The shameful lack of housing

A young Venezuelan recently spoke with satisfaction and pride about how he had managed, after only eight months in the United States, to purchase his own home. He could finally enjoy his privacy and consolidate his married life. Unfortunately, he had to work in New York City cleaning bathrooms, but what else could he do? For the previous five years in Venezuela, after graduating as an engineer together with his wife, he had not even managed to scrape together the minimal down payment required to purchase an apartment.

It is difficult to fathom the accumulation of errors required to create a scenario in which young educated people from an oil rich nation with all the advantages of a tropical climate must immigrate to a country with a hostile winter in order to solve their housing problems. A country’s reserves are not those sitting in the Central Bank, but rather its people, especially after they have invested in a decent education. Today, our Central Bank is raising interest rates in order to keep its dollar reserves. Today, our young human reserves are leaving in droves.

A home is a long-term investment. It is not a vehicle, a trip to some Caribbean isle or a new double-breasted suit. A home for the normal citizen, who lives from his work and savings, is an investment that he hopes to amortize in 20 or 30 years if all goes well. In order to allow a young couple to acquire a home it is necessary to provide them with a real and sustainable source of long-term financing. The key words here are “real” and “sustainable”.

In Venezuela, the conditions for local currency loans are non-existent. To begin with, there is absolutely no possibility to establish fixed interest rates for a long-term Bolívar loan. Either interest rates are so high in real terms that it becomes virtually impossible to service the loan. Or they are too low, which effectively results in undeserved subsidies, which in turn threaten the very existence of the financial system as a whole.

In the case of loans with variable interest rates, the erosion of value due to inflation is usually covered with an increase in the interest rates. This makes the term of a 20- or 30-year loan, whether documented as such or not, a tasteless joke.

Let us take a closer look at this. If inflation rises to 40%, interest rates more than likely will be pegged at around 50%. Should a young couple manage to qualify for a Bs. 10 million loan for a 20-year term, they would need to raise Bs. 5 million to cover interest payments and Bs. 500,000 to cover amortization of principal on an annual basis. After one-year elapses (if they survive) they still owe Bs. 9.5 million. This amount, adjusted for 40% inflation is only worth Bs. 6.8 million in real terms (Bs. 9.5 million divided by 1 plus the inflation rate). Our young couple in essence has amortized the sum of Bs. 500,000 plus the amount corresponding to this adjustment, that is, Bs. 2.7 million. This has absolutely no relation with a 20-year term.

Other countries plagued by inflation have looked for solutions to this problem by denominating loans in indexed units. In this case, the debtor would owe Bs. 13.3 million instead of Bs. 9.5 million after the first year (Bs. 9.5 million plus inflation of 40%). However, instead of having to pay Bs. 5.5 million to service the loan as in our first example, service would have been limited to Bs. 1.5 million corresponding to a 10% real interest rate and the payment of a real amortization of Bs. 500,000.

Evidently, another alternative to indexed units is the denomination of loans in a stable currency, US dollars for example. Even when devaluation could possibly wreak havoc with debt service in the short term, a working person could most likely weather this and adequately service his dollar loan if and when it is contracted under prudent terms. When contracting a dollar denominated loan, a company or bank must immediately reflect exchange losses on their balance sheets. In the case of our young couple, the impact is limited to higher monthly payments which he could eventually expect to offset with inflation adjusted increases in his salary.

It is a shame that a full 15 years after the initial devaluation in 1983, we have not managed to reestablish sources of long-term financing for acquisition of housing. The fact that the Agenda Venezuela does not include a real and concerted effort directed at solving the problem of housing only serves to reinforce my belief that my daughters’ respective agendas have much more meaning.

I hope to stay in Venezuela. Somehow, I feel I would definitely prefer to remain here accompanied by many young, eager and educated people dedicated to the country’s future and without one single dollar in the Central Bank, rather than the other way around.