Economist calls for compensation for residents

 

Mr. Hilber, even in the middle price segment in Swiss cities, condominiums today quickly cost two or three million francs. Rental apartments in Zurich’s Seefeld district with four rooms are sometimes advertised for 5,000 or 6,000 francs. Who can still afford this?

These prices are actually high. However, we must be clear that housing in Switzerland is still affordable on average. The rent in Seefeld is not the average rent in Switzerland. This is a highly attractive, privileged location. Apartments in prime locations are scarce and cannot be increased. So when we pass around rents like this, we have to be careful. Rents in Zurich are still cheap compared to London, where I live.

Many people looking for accommodation in Zurich would disagree with you.

A four-bedroom apartment in Westminster or Chelsea in London is of a different order of magnitude. I’m talking about monthly rents of 10,000 francs and more. Anyone who stays in their rented apartment in Switzerland long enough will have an affordable rent in the long term, even in Zurich. The tenant only pays the current market rent when re-letting. After that, the rent remains largely frozen. And: If you go 20 or 30 kilometers outside Zurich, you will find significantly cheaper apartments.

And in Great Britain?

Cheap apartments within London are usually hardly usable. They are falling apart, covered in mold or infested with rats. Apartments are also very expensive outside of the city center, in the greater London area. If we compare it with Switzerland, housing in this country is comparatively affordable. So you have to keep the proportions.

Where does the dissatisfaction with the housing market in Switzerland come from?

Swiss regulation creates an insider-outsider problem. Anyone who has lived in their apartment for a long time and benefits from a low existing rent is an insider. Anyone who starts a job as a young person and needs a new apartment is an outsider. She pays a high asking rent. On average, living space in Switzerland is still very affordable, but not for everyone.

How does rent regulation work in England?

Completely different. Apart from social housing, all rental housing in England is on the market. The typical rental agreement is limited to one year. Every time a contract expires, the landlord is free to decide whether and at what rent he wants to continue the contractual relationship. He can leave the rent at the same level or increase it by 10 or 20 percent. In fact, he can do whatever he wants.

Then the landlord can increase the rent every year?

Theoretically yes. But of course he also risks a change in tenants. This involves costs and effort for the landlord. But in contrast to Switzerland, it can actually be said: rents in England rise and fall with demand.

So which is the better system for optimally distributing the housing stock?

Mild tenant protection has positive effects. It leads to a certain level of security. People don’t have to worry about suddenly finding themselves on the street one day, as they do in other countries. And you don’t have to accept an arbitrary rent either. Nevertheless, the landlord in Switzerland has leeway to go close to the market rent if there is a change of tenant. This means that the incentives for landlords to provide living space are positive.

What happens if the state intervenes too heavily in the market?

If it is hardly possible for the landlord to go towards the market rental value when re-letting, this will have a counterproductive effect on the housing market in the long term. Particularly in some German cities such as Berlin, the strong regulation removes the incentive for landlords to offer additional rental apartments. The queues for apartment viewings are getting longer. The insider-outsider problem is getting worse.

There are also queues in Switzerland.

However, this problem is not as serious in Switzerland as in foreign cities. New housing construction is comparatively good. Converted per capita, around three times as many apartments are built in Switzerland as in England. In Switzerland, we also see no signs that certain investors such as pension funds are withdrawing from the real estate market.

But in Switzerland too, too little is being built despite lower interest rates.

In Switzerland we are still nowhere near as advanced as in England. England has had extremely restrictive planning and building restrictions for decades. In London and the southeast of the country in particular, it is extremely difficult to build new housing at all. This also has to do with the “Nimby” problem. People say: “Not in my backyard” – no building is allowed in my backyard. In Switzerland we have only been observing similar trends for about a decade.

You mention the revision of the Spatial Planning Act that came into force in 2014. This should stop rural sprawl and focus more on densification in the centers. Until now, that has remained a pious wish.

This is also due to a Swiss peculiarity: municipalities in this country are allowed to levy a municipal income tax. They are in a tax competition with each other. Until 2013, they had a great incentive to zone the largest possible parcels of land on the outskirts in order to attract wealthy taxpayers. The planning system allowed these zonings. In this way, the community was able to generate tax revenue, which was an advantage for all residents. And as long as this structural development took place on the outskirts of the town, the people in the town center cared little. In the long term, however, this has led to the well-known problem of urban sprawl.

How do you assess the situation today?

The municipalities no longer have the same amount of leeway to further zone land as they see fit. On the contrary, some even had to zone out building land again. It became more difficult and also more expensive to build, which is essentially the result of the revision of the spatial planning law. Nevertheless, there is a consensus in Switzerland that they do not want to further expand the landscape, so densification is needed in the cities.

That’s quick to say, but extremely difficult to implement. Why?

There are many factors. High-rise buildings in inner cities attract a target audience that generates less tax revenue. Very wealthy individuals can hardly be lured to the city center. No Roger Federer will move there. At the same time, existing residents are bothered by the high-rise buildings. There are objections, appeals and delays. There are fewer and fewer incentives for project developers to build at all, or in any case it is becoming less profitable to create new living space.

You are an economist. How would you solve the “Not in my backyard” problem if you could set the rules?

The right incentives should be set and residents should be compensated. Let’s imagine an old, demolished residential building in the middle of the city. If the real estate developer is allowed to build not just the existing two or three, but ten floors in the new building, the owner achieves a high increase in value. With higher permitted utilization, the value of the property increases significantly. Part of this planning profit could be skimmed off and given to the surrounding residents.

What would be the advantage of this solution?

The added value created by densification would not only go to the owner of the property. The surrounding residents were also allowed to participate in some of this. The key thing would be to set clearer rules. There would no longer be any obscure deals and years-long negotiations between residents and developers regarding building permits as there are today. The legal uncertainty on the part of the project developer would be eliminated through a clearly structured process. Because delays and years of negotiations only unnecessarily increase development costs. Of course, the specific design would have to be considered more closely, for example the exact redistribution of planning profits.

What do you recommend to lawmakers?

Essentially, the incentives for interior development would have to be designed in such a way that the developers make a profit and the project development in the city center is attractive. At the same time, there must be sufficient funds to financially compensate the negatively affected residents.

What if the legislature fails to solve the compaction problem?

I fear that the insider-outsider problem will become significantly worse in the future if the internal development of cities cannot be realized. Switzerland will then be threatened with similar long-term conditions to those in England. On the one hand, there are huge queues for social housing and, on the other hand, the highest homeless rate of any developed country in the world. Young people are forced to stay in their parents’ homes longer. More and more people have to live in very small living spaces.

That sounds very dystopian.

And unfortunately that’s not all: the British state protects the huge green belts around the cities at all costs. Building restrictions in the centers prevent greater building heights. Then there is also the protection of monuments. If you can no longer afford the city center, you can’t simply live a little way outside the city because that’s where the green belt is. This means he has to spend two or even two and a half hours commuting to even get to work in the city center. So people move far away, to places where housing is affordable for them. Economically, we have higher commuting costs and undesirable ecological consequences due to increased traffic.

What are the economic consequences of these inefficiencies?

Very rigid spatial planning restrictions lead to a misallocation of workers. People can no longer work and live where they are most productive. As a result, economic output falls.

One final question about immigration: How much does this contribute to housing shortages and high rents?

I have big reservations about that. Of course, immigration increases the demand for housing, which above all increases rental prices. If you have a flexible offer, as was the case in Switzerland until 2010, then prices and rents do not rise so much because the offer can react. There are also many other factors that influence demand, such as the development of real, i.e. inflation-adjusted, income. When real incomes rise, the willingness to pay and thus demand increases. This effect is often stronger than that of immigration.