GOVT NOT HELPING HOUSING SECTOR WITH PRICE CONTROLS

Parliament last week passed the Landlord & Tenant Bill 2018 which was first brought to the house in 2016.

While the bill had some laudable provisions to regulate relations between landlords and their tenants – notice for eviction, security deposits and the landlord’s right to access the premise, it had some potentially regressive clauses.

But first a bit of context.

Three decades ago there was an acute shortage of housing in Kampala and the country generally.

"In Kampala a garage was considered acceptable accommodation for the corporate types of the day, there used to be a phenomenon called “goodwill” where people paid seating tenants to move out of their flats in Bugolobi or Bukoto and intending tenants paid up to a year in advance to secure an apartment...

All these have changed for the better as the stock of housing has increased. Classic supply and demand economics. When the supply is low the owners of the houses can set the price but when the supply increases the bargaining power shifts towards the tenant.

The increase in housing has been little thanks to government development, who have barely built a thousand units in the last 30 years. Individuals and private investors have jumped in to fil the gap, which while it is reported that there is still a deficit, it is much less than it was before.

That private sector players have jumped in to fill the gap did not happen by mistake.

For one, real estate development being a long term investment the relative peace of the last decade has made it a viable option.

Just as important was government’s resolve top fend off calls in the 1980s for it to institute rent controls or to discourage of payments of rents in hard currency.

The call for rent controls was because the rates were high – the aforementioned garages were being rented out for the equivalent of $200 in some places. The politicians of the day thought this was unfair and thought they could curb the landlord’s “greed” by fiat.

No one has dollars so why are you charging in dollars they argued then. But many landlords were absentee landlords and didn’t want anything to do with the inconvertible Uganda shillings, which was being ravaged by inflation rates of up to 240%, so as a hedge they asked of rent in dollars.

"By refusing to what seemed like commonsense but was disastrous economics, government gave the private sector the confidence that if they invested in the real estate sector they would get a fair return....

So they went out and built and as they did rents became more manageable and the quality of housing improved. Which corporate worker now rents a garage?

This context was clearly lost on the MPs last week when they passed provisions banning the charging of rent in dollars and capped rental increments at 10 percent annually.

These measures were intended to keep rent affordable but could very well have the opposite effect.

Nothing good ever comes from subjecting the market to non-market forces. Let’s assume the MPs get their way and landlords cant charge in dollars and are restricted to a maximum of ten percent annual increments, how will the land lords react?

First off the people borrow in hard currency not because it is sexy but because they can get lower borrowing rates and the exchange risk can be passed on to the client.

The exchange rate has been relatively stable in recent years – except in 2015 when the shilling depreciated 40%. So the landlords will continue to borrow in dollars but will now raise rent every year by the required 10 percent as hedge against future fluctuations in the currency. What this means we can expect rent to double every eight years. The crazy thing though is that if I am a landlord in the same location and I will increase my rents like my neighbor even if I don’t borrow in foreign currency.

For intending landlords they may very well decide that the economic gymnastics of trying to stay ahead of the dollar would be too much and decide to invest elsewhere. So there will be slow down in rental properties in the market and in classical supply and demand style rents will go up everywhere as the bargaining power switches back in the landlord’s favour.

What if the MPs had thrown out the proposals for landlords not to charge in hard currency and to restrict rental increments to 10 percent, what would happen?

The landlords would continue to borrow in dollars and charge in dollars. They would build more units increasing supply and reducing their bargain power. A situation would reach where landlords would be forced to find alternative hedging mechanisms against the currency fluctuations or get out of the market all together as tenants would resist pay in dollars.

"If MPs wanted to achieve their goals they would use an understanding of the market to keep rents low. It’s really about increasing the rate of real estate development.I They could legislate against the impediments hobbling the construction sector.

They could for instance mandate government to subsidise or take over the laying down of infrastructure in real estate developments, which costs can account to up to 50 percent the building costs. They could capitalize the mortgage finance industry, lowering their cost of capital and therefore bring mortgage rates down. They could provide other tax incentives for developers and investors in the sector as a means to increase the pool of housing and brig down rents.

The temptation to resort to price controls in its various forms is always high, but it is bad economics and eventually turns out to be bad politics as well.

The fact that MPs could pass such a law tells me that they are not enough landlords in the house. Previous laws which have gone against the producers tells me too that there are not enough producers in the house.

That means that MPs are dominated by consumers, unwilling to make the hard decisions in favour of producers or landlords that will take this economy forward. That is a very scary thing.