Housetage Crisis
The housing market in Lebanon confronts an aggressively complex economic stalemate. Lebanese real estate is in a pervasive condition of paralysis. The present condition of market immobility is a product of short-sighted policies enacted in the last few decades. Today’s housing market has to swallow the consequences of these policies, threatening to evict long-residing individuals in Beirut and further inflate rental prices. Landlords also have their fair share of grievances; they are disheartened from an immobile market and from low returns on their property. A complex web of issues, and we have yet to find the silver lining. Former Director of Housing, Mohammed Younis, claimed that there are over 200,000 vacant apartments in Lebanon and yet prices continue to skyrocket. Indeed, this development is a puzzling one.
Recently, a rental law has been enacted to deal with the problem of “old rental contracts,” more specifically, rental contracts signed before 1992. These rental contracts conformed to previous policies implemented throughout the 1970s and 1980s in correspondence with the conditions of the civil war. Four decades ago, the Lebanese government began freezing rental rates of many apartments throughout Beirut in order to resolve short-term volatility issues in the housing market throughout the civil war. However, the problem with short term solutions is that they tend to have severe shocks in the long term. To reference another instance: the reaction of the Fed to the OPEC crisis by increasing the money supply. The long term result was an astronomical increase in interest rates (20%-22%) in the 1980s. Short term relief often leads to long term pain, and this is precisely what has happened to the housing market in Beirut. Until today, most old rental contracts are still protected under the law and pay a minimal level of rent compared to the property value owned by the landlord. The Lebanese government embraced liberalized rental agreements for more recent rental contracts, post-1992, in an effort to spur investment in real estate once more. However, the policy of the 1990s is completely in conflict with the contracts under the old rental regime. It has created a great deal of asymmetrical rental prices for apartments that are, more or less, identical. Recent lobbies have emerged calling for the liberalization of these old rental contracts. Although sensible in terms of market equilibrium, the liberalization of these old rental contracts will have severe social and political consequences. Housing prices in Lebanese real estate have soared. The average price of an apartment in Beirut is $1.091 million. If liberalization of old rental contracts is to be enacted, most residents would be forced to evacuate from the city. The native population will no longer be able to afford living in the capital. One may say that re-locating to the suburbs may be more worthwhile. Unfortunately, Lebanon lacks the infrastructure to support a commuting society. The public transport system is relatively non-existent and the highways are too congested.
Landlords face a greater dilemma. Most landlords with buildings from the 1970s or 1960s own properties that are only three to five stories high. Furthermore, most of their tenants are under the old rental contracts. Landlords are making huge losses and negative returns from their own properties. Tenants are paying low rents and achieving higher standards of living than their own landlords. Landlords cannot afford to modernize their buildings because the rents they receive are already so low. The market is in deadlock and this, perhaps, best explains the large number of vacant apartments. Landlords are no longer willing to rent out their apartments in a bid to protect their own wealth. Most landlords might consider demolishing their old buildings in order to build more rewarding buildings under new rental contracts. Appropriate policies need to be enacted to minimize social and political outcry, reduce inefficiency and give landlords and tenants their fair share of the market.
It is difficult to suggest a solution or an alternative to the given situation given that the socio-political conditions in Lebanon are so intricate and complex. Sectarian strife and regional conflicts are ever-present and will always be secondary factors that will play on the market. In my opinion, Lebanon needs an institutional cleansing. This will take time, effort and determination but it is the only sustainable solution to our present day strife. We need institutions to regulate the real estate market and ensure that all stakeholders are adequately protected under the law. The law also needs to be changed and reformed. The old rental contracts should gradually be changed over time such that tenants slowly climb towards the market price of the apartments they live in. New rental contracts should be priced accordingly with the market. Landlords should be compensated with a fund from the government to make up for the temporary losses they are facing until older tenants reach a more reasonable level of rent. This should stop landlords from evicting tenants out of the capital and help restore the mobility of the market. Perhaps we will need a third party, such as international firm or agency, to regulate the funds given to landlords. This may reduce any moral hazard or corruption associated with most local funds in Lebanon. This suggestion may not be wholly practical, but we better start thinking of one that is.
N.C
The housing market in Lebanon confronts an aggressively complex economic stalemate. Lebanese real estate is in a pervasive condition of paralysis. The present condition of market immobility is a product of short-sighted policies enacted in the last few decades. Today’s housing market has to swallow the consequences of these policies, threatening to evict long-residing individuals in Beirut and further inflate rental prices. Landlords also have their fair share of grievances; they are disheartened from an immobile market and from low returns on their property. A complex web of issues, and we have yet to find the silver lining. Former Director of Housing, Mohammed Younis, claimed that there are over 200,000 vacant apartments in Lebanon and yet prices continue to skyrocket. Indeed, this development is a puzzling one.
Recently, a rental law has been enacted to deal with the problem of “old rental contracts,” more specifically, rental contracts signed before 1992. These rental contracts conformed to previous policies implemented throughout the 1970s and 1980s in correspondence with the conditions of the civil war. Four decades ago, the Lebanese government began freezing rental rates of many apartments throughout Beirut in order to resolve short-term volatility issues in the housing market throughout the civil war. However, the problem with short term solutions is that they tend to have severe shocks in the long term. To reference another instance: the reaction of the Fed to the OPEC crisis by increasing the money supply. The long term result was an astronomical increase in interest rates (20%-22%) in the 1980s. Short term relief often leads to long term pain, and this is precisely what has happened to the housing market in Beirut. Until today, most old rental contracts are still protected under the law and pay a minimal level of rent compared to the property value owned by the landlord. The Lebanese government embraced liberalized rental agreements for more recent rental contracts, post-1992, in an effort to spur investment in real estate once more. However, the policy of the 1990s is completely in conflict with the contracts under the old rental regime. It has created a great deal of asymmetrical rental prices for apartments that are, more or less, identical. Recent lobbies have emerged calling for the liberalization of these old rental contracts. Although sensible in terms of market equilibrium, the liberalization of these old rental contracts will have severe social and political consequences. Housing prices in Lebanese real estate have soared. The average price of an apartment in Beirut is $1.091 million. If liberalization of old rental contracts is to be enacted, most residents would be forced to evacuate from the city. The native population will no longer be able to afford living in the capital. One may say that re-locating to the suburbs may be more worthwhile. Unfortunately, Lebanon lacks the infrastructure to support a commuting society. The public transport system is relatively non-existent and the highways are too congested.
Landlords face a greater dilemma. Most landlords with buildings from the 1970s or 1960s own properties that are only three to five stories high. Furthermore, most of their tenants are under the old rental contracts. Landlords are making huge losses and negative returns from their own properties. Tenants are paying low rents and achieving higher standards of living than their own landlords. Landlords cannot afford to modernize their buildings because the rents they receive are already so low. The market is in deadlock and this, perhaps, best explains the large number of vacant apartments. Landlords are no longer willing to rent out their apartments in a bid to protect their own wealth. Most landlords might consider demolishing their old buildings in order to build more rewarding buildings under new rental contracts. Appropriate policies need to be enacted to minimize social and political outcry, reduce inefficiency and give landlords and tenants their fair share of the market.
It is difficult to suggest a solution or an alternative to the given situation given that the socio-political conditions in Lebanon are so intricate and complex. Sectarian strife and regional conflicts are ever-present and will always be secondary factors that will play on the market. In my opinion, Lebanon needs an institutional cleansing. This will take time, effort and determination but it is the only sustainable solution to our present day strife. We need institutions to regulate the real estate market and ensure that all stakeholders are adequately protected under the law. The law also needs to be changed and reformed. The old rental contracts should gradually be changed over time such that tenants slowly climb towards the market price of the apartments they live in. New rental contracts should be priced accordingly with the market. Landlords should be compensated with a fund from the government to make up for the temporary losses they are facing until older tenants reach a more reasonable level of rent. This should stop landlords from evicting tenants out of the capital and help restore the mobility of the market. Perhaps we will need a third party, such as international firm or agency, to regulate the funds given to landlords. This may reduce any moral hazard or corruption associated with most local funds in Lebanon. This suggestion may not be wholly practical, but we better start thinking of one that is.
N.C