Lebanon in need of a housing policy

Help for first-time home buyers

Photo by: Greg Demarque/Executive

There is a perception among Lebanese that the state is unresponsive to the needs of the public—it’s easy to understand why people might think that. For much of their thrice-extended mandate, from 2009 until May’s parliamentary elections, lawmakers neglected to legislate, the presidency was vacant for two and a half years, and laws that were passed were often not immediately or fully implemented due to long stretches of time under caretaker governments.

Through most of 2018, the country has experienced a real estate crisis affecting low-income households looking to buy starter homes (see overview). Until the end of 2017, Lebanon was offering subsidized home loans through a central bank financing mechanism that made cheap credit available to the country’s commercial banks, on the understanding that savings would be passed on to home loan borrowers. This was the general nature of a multi-sided subsidy program that made up around $2 billion of housing loans per year. When this financing mechanism was discontinued, it effectively ended subsidized loans.

Just as Executive went to print, Parliament—in a rare instance of rapid responsiveness to a public need—offered a solution: Legislators passed a law establishing a one-year $66 million fund that would allow qualified borrowers to again access subsidized loans through the Public Corporation for Housing (PCH), a state agency. But this solution is a temporary one; the mechanics of the new law are not yet known, nor is the date on which the disbursement period is scheduled to begin. We also do not know when the law will take effect because there is no government to implement it. In addition, there is no clarity on how the state will finance this law.

What Lebanon really needs is a permanent solution to finance the subsidy for PCH qualifiers, and this should come as part of a multi-year comprehensive housing policy.

To develop and implement a comprehensive housing policy requires a government. Executive does not call for the state provision of housing, because such a policy is oblivious to market mechanisms, limits the freedom of choice of where people can live, and would rely on the government to monitor and regulate these properties to ensure they were maintained and remained safe to live in—not a proposition that many would favor given Lebanon’s rampant corruption and frequent gaps in governance.

Financing the subsidies

For a housing policy to work best, it needs to allow people to live where they want to and to support them in doing so. A policy for Lebanon needs to support urban productivity, because everything in this country depends on its improvement. This would include infrastructure that helps people commute from home to work, or that enables them to work from home in a way that meets the needs of 21st century business operations. Such infrastructure would include fast internet, 24-hour electricity, and decent quality public transportation. Such a housing policy needs to be integrated with urban planning, infrastructure, and the development of industrial zones. A market-based housing policy is needed, because the market is a better conduit for housing than the government, which would likely build public housing whose quality it couldn’t maintain.

Financing home loan subsidies should be a part of the housing policy. The state should avoid using indirect taxation or taxes targeting consumers, such as the value-added tax (VAT), to pay for the subsidy. An indirect tax or a consumption tax is not redistributive because it disadvantages lower-income taxpayers, who would then spend more money on consumption.

Giving the banks a tax break, one idea floated to Executive by lawmakers and industry stakeholders as a means to pay for the PCH subsidy, is also not a redistributive mechanism. An example of a financing method that would be redistributive is a tax on real estate above a certain value—wealthy landowners should have to pay more in taxes to purchase land and luxury-grade property.

That the subsidy would pay for itself from the collection of taxes and fees by the state up and down the real estate and construction value chain is a notion referred to as deferred financing: the subsidy will be recouped, but must be paid out first. This is a lovely concept—if you already have the money—but Lebanon has been running primary deficits, and to date, the state has piled up $83 billion in public debt, so deferred financing is not a realistic option.

For a long time Executive has been calling for a change in Lebanon’s tax system—from indirect to direct taxation—and this year’s housing loan crisis is another reminder of the need for direct taxation in order to finance housing subsidies for the benefit of poorer households. Last fall, Alain Bifani, the director general of the finance ministry, told Executive that new taxes legislated at the end of 2017 were a first step toward more equitable taxation and the redistribution of wealth: It is now up to Parliament to come up with the second step.

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