Hugo's Pinkonomics is Killing Venezuelan Housing

♠ Posted by Emmanuel in , at 8/03/2009 04:34:00 AM
Inflation is a problem for businesses in that it is hard to foresee future costs. In turn, this makes it difficult to apportion investment since determining discount rates is quite challenging. That is, you cannot make realistic forecasts of returns on investment when various costs are in a constant state of flux.

Venezuela is a particularly interesting situation. In addition to contending with inflation, you have to deal with arbitrary rule changes instituted at the whim of Comrade Hugo. While Chavez has made the amusing suggestion that he is to the right of Obama, you can bet that Hugo has far more leeway in getting government apparatus to follow his agenda without much consultation from other parties. Today's case concerns housing. As builders have found a hard time dealing with inflation, the have instituted contracts that make clients pay for adjustments in the cost of construction. However, the government now charges that widespread abuses of this system have occurred. In what follows, the LA Times writes that while there are indeed some abuses, the fundamental issues of why socialism has failed in providing insufficient public housing as well as the aforementioned one of dealing inflation remain unresolved:
Home-building in Venezuela is not for the faint of heart. For starters, you've got land seizures, squatters, double-digit inflation and socialist President Hugo Chavez's unveiled hostility to private enterprise. Now builders such as Mariano Briceño, a 30-year veteran of the construction industry here in western Venezuela, are facing a new curveball: an order from the Chavez government to give large refunds to home buyers.

"This isn't socialism -- it's abuse and nonsense," said Briceño, an MIT grad. He said the national home builders association is protesting the order this week before the Supreme Court. "It's a populist attempt to pit the have-nots against the haves." The mostly low- to middle-income buyers at Briceño's Yucatan subdivision paid cash at the start of construction, but promised to pay adjustments for inflation between purchase and move-in, a common sales practice here.

The clause is designed to protect builders against rising material and labor costs, but Public Works and Housing Minister Diosdado Cabello has accused the construction industry of abusing the practice, and this month he ordered builders to refund the inflation charges. Venezuela's inflation rate over the last two years has topped 40%. With an average final price of $30,000 per unit at his Yucatan subdivision here, Briceño says, returning the inflation charge to his 2,000 buyers could bankrupt him.

The increasingly difficult climate for home builders and the inability of the Chavez government to deliver on promises to build enough apartments and houses have led to a housing deficit now estimated at 2 million units. One survey recently rated Caracas, the Venezuelan capital, as the most expensive city in Latin America for foreign executives, in large part because of skyrocketing rents caused by the housing shortage.

Chavez has presented several plans to address the problem, and has often said housing should be controlled by the government. He recently announced a new kind of low- income housing to be financed by oil revenue. Still, private industry built 45,600 units last year, twice as many as the government.

Miguel Tinker Salas, a history professor at Pomona College, cited abuses in the home-building industry's practice of buyers paying in advance and then having to pay more later for inflation. "Undoubtedly, the construction companies need to recoup cost increases, but with little control over the process, some companies have also used the system to increase profits," Tinker Salas said...

Economists say the Chavez government's attempt to impose controls on vital industries such as housing has only led to scarcities and rising prices. According to Venezuela's central bank, the inflation rate for the last 12 months is running at 27%, the highest in Latin America.

The constantly shifting playing field for private industry is a major factor in investor flight and the alarming drop-off in the economy's productivity, said economist Jose Manuel Puente, an economist at IESA, a Caracas graduate school of business. "Venezuela has always had a housing deficit, but it's gotten worse in the last 10 years, since Chavez took office," Puente said."With the oil price boom, he has had the resources to improve things, but relatively little has been accomplished."
We keep hearing about housing inventory gluts elsewhere in the world being a cause for a concern that it's interesting to hear about places where insufficient housing is a problem. This parable should be instructive for Barack Obama as he places more and more economic activity under the ambit of government control. Ah, the joys of galloping inflation.