More important than affordable houses for the young, is for them to afford houses.

A letter sent to The Globe and Mail (not published)

The Inter-American Commission of Human Rights (IACHR) has joined UN Rapporteur in recognizing Canadian Human Rights-Based Approach to Housing. When it refers to the creation of safe and affordable housing during the next 10 years for the Canadian population most in need, such as women and children fleeing family violence, seniors, persons with disabilities, those dealing with mental health and addiction issues and veterans, I cannot but concur.

But, it also makes reference to “young adults” and, in this, as a grandfather of two Canadian girls, I must raise my hand to argue that much more important than allowing the young adults affordable housing, is allowing them to afford houses.

Currently, because banks are allowed to leverage more with “safe” residential mortgages than with loans to the “risky” entrepreneurs who stand a better chance to create the future jobs our young need; and banks therefore earn higher risk adjusted returns on equity with mortgages than with loans to entrepreneurs, Canada, like all countries using the Basel Committee’s risk weighted capital requirements for banks, has put the horse before the cart.

PS. Not sent to The Globe and Mail: What would the price of a house be if there was no financing available to purchase these? Of their current price how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish

PS. Chinese money: What’s the problem with Chinese freezing some of their wealth in Canadian real estate? What’s important is what those selling that real estate do with the money. Or not?

Research project: How much in the current house prices can be attributed to the market having priced in all preferential treatments the society has awarded the financing of houses… like the low risk weights in the risk weighted capital requirements for banks?

@PerKurowski

If I were president (II)

In yesterday’s installment I mentioned the fact that the first thing I must receive in order to responsibly comply with my presidential obligations are certain special powers. Supposing I actually received these powers, I then began to list some of the concrete measures as an example of what I would do during the first 100 days of my term in some specific areas of concern. Here are some more.

Education: A single, all encompassing data base must be put together, identifying each and every active teacher on a school-by-school basis. These teachers will immediately receive an increase in pay and an additional fixed percentage of the payroll amount will be awarded each school to cover administrative expenses. Evidence of false information will result in the immediate suspension (for lying, aiding or abetting) of all the teachers of that particular school. All others that are unduly receiving pay without working from the Ministry of Education will be awarded eternal vacations without pay.

Reduction of public spending: In order to rationalize public spending, as similar strategy as the one above will be implemented. All personnel that are to be dismissed will be paid the equivalent of three month’s salary and all other severance payments will be paid in the form of negotiable Public Sector Restoion Bonds (PSRB). The value of these bonds will increase in the measure that restoration of the public sector is successful.

Infrastructure: All savings from the restructuring process will be invested, after covering fiscal deficits over 3% of GNP, in infrastructure projects, such as energy and water for Margarita and Zulia and a truly nationwide railway system.

Housing: The Central Bank must immediately make available through the private banking system, a credit facility to the tune of US$ 2 billion aimed at issuing long term loans in US$ and fixed rates for acquisition of housing.

Foreign investment: Foreign capital investments will be regulated in order to minimize damage caused by short term capital flight (i.e., the Mexico syndrome). Other countries in Latin America have such regulations in place.

Economic diversification: The oil sector does not create employment. Venezuela’s commercial policies must be renegotiated to achieve the equilibrium of our trade balance in terms of employment generation and not balance in monetary terms as it stands now. An annual budget will be allotted to allow for the protection of certain sectors of the economy, specifically agriculture. Cover under this scheme will be allocated to those sectors within agriculture that we can be competitive in without excessive costs (i.e. rice rather than apples).

Petroleum/Petrochemicals: PDVSA will continue to manage the development of our petroleum industry. However, a special Office of the Petroleum Ombudsman (OPO) will be created. This will allow the common citizen to get closer and to increase his knowledge and control of what is the country’s principal asset. The members of this office will be elected at random from among a list of candidates that have been carefully screened, have complied with some basic requirements and have been presented as such by the Venezuelan people. The Office will be initially asked to analyze why the industry is spending its precious resources in rebuilding a slew of gas stations. In the same sense, I would like to insure that our petrochemical industry is not just reopening Sidor’s covered grave with its new investments.

Taxes/Duties: There will be no more value added tax (VAT) as long as the country continues to perceive significant income from oil. Customs at our ports will be handed over to the private sector management. This will ensure that income that should reach government accounts does not continue to feed unscrupulous individual pockets.

Superfluous functions: Until the State begins to perfectly comply with its responsibilities in fundamental areas such as education, health and security, all other superfluous functions will be suspended. For example: if the local stock market really needs a regulatory entity such as the National Security and Exchange Commission, the market must cover the costs incurred. Today, it is preferable to stamp each issue with the words “Beware – Not Regulated” than to create the false illusion that some control is imposed, and in some instances, actually abet fraud through simple omission.

Day 100 – Evaluation: If my team and I are not able to successfully implement our government’s plans, we must resign and convene new elections. Remember, I have initially made a promise to resign without pension and without a seat as Senator for life in order to avoid a) further degeneration of the stature of the office of the President and b) wasting another four years and nine months of this poor country’s destiny.

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.