Monsieur La Palice’s answers to Portugal’s Housing Problem

 In Housing, News, Property

La Palice was a French soldier, from the XVI century, about whom songs were written. Then a verse of one such song was changed, to something like: “if he hadn’t died, he would be alive”… and his name became synonymous with stating the bloody obvious.

Opinion article by Rui Ramos-Pinto Coelho, founder and Investment Partner of 6 Graus, a company which collaborates with investors, companies, entrepreneurs and municipalities to promote investment in Portugal.

Lisbon’s problem of a lack of affordable housing is serious, complex, and for several years the subject of much discussion. So maybe an imaginary interview with La Palice can help us crystallise some ideas.

Dear Monsieur La Palice, is real estate an important sector?

Real estate is a very important cluster, the biggest in the world economy, and the one that provides the homes we need to live in, the offices to work, etc…
There’s an idea that it’s an unsophisticated sector. Some even say that their goods are not tradable, LOL… But our quality of life depends on the quality of the real estate we live and work in (not even in my castle was it as cold as in the houses in Lisbon), and poor quality can lead to deaths (as we saw in Turkey).
They no longer build houses like you do in civilised countries… they build them in wood and steel, in a modular, clean, quick, and sustainable way, assembled by huge cranes.
Your leaders want Technology… Industry… undoubtedly important. But even for that, real estate is needed: Years ago, when Google chose Lisbon to install new services, it did not find an office with the desired quality in the city and, to the surprise of many, set up in Oeiras. If they hadn’t found it in Oeiras, they would have gone to Warsaw. Like it or not, cities are made of real estate.

Are the houses expensive?

You could say “it is not the houses that are expensive, it is our wages that are low”. Strange as it may seem (quantitative easing helped but does not explain everything), many professions of great responsibility and importance such as teachers, police, nurses, etc., are less valued than an organised set of steel, bricks and cement… that should be mass-produced.

Is it easy to solve the housing problem?

Yes, it’s very easy. You must recognise the problem, truly want to solve it, find people who know how to solve it, and give them the resources to solve it. This sounds simple, and it is. There are many examples of more complex problems solved with this method…

Why are houses expensive?

Probably because we have more demand than houses: the famous “Law of Supply and Demand”.
The population increased and the migration to the cities too. With the increase in inhabitants, more buildings are needed, and a new use, highly space-consuming, gained enormous ground: tourism (Lisbon has about 550,000 inhabitants and receives about 4.5 million tourists per year).
It so happens that Lisbon has 100 sq. km (Madrid has 604), largely occupied by the airport, Monsanto Park, the port, and the historic centre, and we started to demand more urban quality: gardens, areas set aside around monuments. These are all advantages, but there are no miracles in real estate: either there is land to build on, or you build tall buildings. If buildings don’t go up, prices do…
There is also the “not in my backyard” phenomenon. Remember the population’s opposition to the affordable housing project in Restelo. Those who already have a house do not want many houses to be built in their vicinity (+ traffic – parking = devaluation of their homes).
To solve the problem of the lack of housing we must build more houses. And to bring prices down we must build a lot more houses. Have you heard about “Economies of Scale” (the greater the quantity produced, the lower the cost per unit), meaning, industrialisation and modular construction?

What about vacant buildings?

If we need housing and the space is scarce it doesn’t make sense to have vacant buildings, and they create insecurity (fires, risk of collapse) and make cities uglier.
In Lisbon, the hundreds of vacant State properties, abandoned for years on end, falling into disrepair, victims of theft of copper and tiles, and of tags, heritage that belongs to the people and that the city lacks, are a shame.
Someone had the idea of using these properties for affordable housing, but many of them (hospitals, barracks, palaces) would be too expensive to transform (rehabilitation and small scale) being more useful for other uses that the city also needs. So, it would be better to sell them and use the revenues to build affordable housing (new construction on a large scale). These are examples of the concepts of “best use”, (properties must be used in the way that gives them the highest value) and “portfolio management” (strategically buying and selling assets to maximise usefulness).
Vacant private properties have the same effect. Usually, they are victims of endless lawsuits, inheritances, (arbitration courts should be mandatory to speed things up) or await licensing.
The right to private property must be accompanied by the duty to keep properties in good condition and in good use. The welfare of the city (society) is far more important than the whim or incompetence of an individual. A few years ago, it was decided to increase the property tax in these situations, which I think it is the best way of dealing with the matter, but the increases must be higher and effectively applied.

Lease or buy?

Buy, buy, buy. After 20 years of paying mortgages, you will own a house, while after 20 years of paying rent, you will only have a bunch of receipts. It is a great investment and security now that we live longer. The State should help citizens to buy – cooperatives; subsidised interest; support down payments. The old story of wiping out the poor instead of wiping out the rich. The Mayor of Lisbon is correct in insisting on ending the transaction tax.

And Urban Plans?

Plans are needed. But they are terrible when they are just inventories of state and private intentions, once the characteristics of the territory must be the main concern, or when they take so long to develop, that by the time they are implemented they are hopelessly outdated. Consider, for example, the allotments in Alta de Lisboa, that require four and five bedroom apartments when actual demand is for two bedroom apartments (families have become smaller)… and require several levels of subterranean car parking, which increase the costs of construction immensely at a time when we should really stop using cars and we need affordable housing.

And Licences?

To be able to build projects must be approved, licences obtained, and fees and taxes paid. Which means bureaucracy, delays, risks, and costs… Once “time is money”, and risks must be remunerated, the process increases costs to the developer and of course to the final client.
Some years ago, I suggested the acceptance of terms of responsibility and increasing the supervision and now the Government included that idea in its plan (Bravo!). Meanwhile, we are still waiting for the simplification of legislation…

And taxes?

In Portugal, taxes represent 40% of the cost of new housing. VAT on new construction is 23%, not tax deductible (unlike in Spain). The only conclusion that can be drawn is that for the State a house is a luxury.
There are incentives in zones denominated as Urban Rehabilitation Areas, such as 6% VAT, but that’s not suitable for affordable housing because the city centres are expensive, rehabilitation too, and there is no scale… It no longer makes sense to favour rehabilitation over new construction. We are benefiting the rich and penalising the middle class.

Should we blame the Golden Visas for high prices?

Blaming foreigners is an idea often used to divert attention from our shortcomings.
The most repeated lie in Portugal is that the Golden Visas did not create jobs. It turns out that they raised over €6Bn of investment in real estate, creating thousands of jobs in Architecture, Engineering, Construction, Building Materials, Legal Services, Real Estate Development, etc., in addition to paying taxes and rehabilitating the centres of Lisbon and Porto.
Actually, foreigners don’t need Golden Visas to reside in Portugal, they just need to prove that they have income (Visa D7) so the end of Golden Visas is just an invitation to use this cheaper alternative.
Portugal needs to attract foreigners, as they are a source of investment, entrepreneurship, employment, and income. Foreigners don’t steal jobs, they create jobs. Foreigners do not steal our houses; they buy them for the price we sell them, and some of them even build houses and would build affordable housing if it were financially feasible. Without them, we would be much poorer.
And Non-Habitual Residents pay a lot of taxes, much more than if they didn’t live here…

What should the State’s role be?

The State should lead, improve laws, and create incentives for the market to provide affordable housing. It should develop plans for city expansion (That’s how Parque das Nações was built), expropriate (What would Lisbon be like if it weren’t for Duarte Pacheco?*). It should encourage municipalities and investors because when problems are big and urgent (as is the case) they can only be solved by working together. It is a dangerous illusion to think that the State can solve them alone. Persecuting entrepreneurs and investors is never the right path (have you forgotten how the centre was rehabilitated?).
But the State should not implement real estate projects, it is too slow and not cost-sensitive. Six years ago, a powerful minister announced that he was going to transform an office building owned by the Ministry of Education into student residences, but work has not even yet started. And we all know how the budgets in the works of the State are always surpassed.
The State must assume that housing is as essential as education, so it must give it the same priority. Some people are unable to secure accommodation on their own, and in these cases the State must provide them one, not just because it is a moral imperative, but because it is a rational decision, so it doesn’t lose citizens to illness and crime. Or do you think it should be acceptable for a family to sleep on the street, or in illegal neighbourhoods in Portugal in the 21st century?

*Duarte Pacheco, a Portuguese statesman, city planner and minister of public works during the 1930s.

Image: Bibliothèque Sainte-Geneviève, Paris, France