Lebanese Housing Subsidies: Authoritarian Control Over People’s Choices
Government subsidies, which are highly supported by the fiat monetary system, play a not so apparent but nonetheless significant role in increasing society’s time preference and in de-civilizing it by shifting its voluntary decision making.
Subsidies play a huge role in shifting society’s time preference but also its consumption preference as a whole. Whenever people make a consumption decision, this decision is always based on quality in comparison to price. It is a value for cost type of calculation. Consumption is always based on subjective needs. A specific product could serve you now at this right moment more than it could serve you tomorrow, next week or simply at a different time stage. This brings us to the law of diminishing marginal utility, introduced by Carl Menger. This simple law, which emerged from the Austrian school and is now taught in conventional economics classes, explains that once a consumer receives a certain good, the need for an additional quantity decreases. Imagine you are craving an apple; you pay LBP 1,000 for an apple to eat it now. Once you do this, it becomes less likely for you to purchase another apple at the time you ate the first one. You would always value the first apple more than the second one and the second over the third and so on and so forth. Subjective decision making of consumption is based on price, quality and need. Government subsidies disrupt this natural flow of decision making which is based on the bottom-up approach. When the government decides to subsidize a specific good, it is actively trying to push the consumption of this good to the masses. Most of the time, government subsidies are advertised by some academics as “essentials” or “basic human right”, but the truth is that the so called “essentials” never need the endorsement of a third party to be available in the hands of the population. Those goods will be acquired by the people based on the consumption decision making factors mentioned above, and it is always the demand that drives markets. When there is a big demand for a certain good, a huge market for it in the free economy gets born to meet this demand. Imagine a community which got struck by a natural disaster that led to the destruction of the means of production and almost made all consumption goods vanish. The natural instinct of the people is to rebuild, and first things first, they will look at ways to produce the so called “essentials”, which are mainly food and other survival-based goods. Subsidies are not meant to provide people with essentials, they are meant to endorse specific products, and monopolize others in order for the government to keep its clutch on the market and on specific profitable industries.
In this article, I decided to depict a very dangerous subsidy made on the Housing industry in Lebanon, through “Isken Loans”
Banque de L’Habitat, Isken Loan
If you own a house or an apartment in Lebanon, there is a high probability that you took out a loan from ‘Banque de L’Habitat’ in order to purchase it. What is known as ‘isken’ loan is a subsidized, zero interest loan on housing purchases in Lebanon. Such loans are distributed via private banks who work as brokers for Banque de L’habitat. These loans created an ever-inflating real estate sector in Lebanon. According to globalproperty.com, the Lebanese property market increased by an average annual price of 18% from 2009 to 2013, and it increased by 48% from 2008 to 2009. Ever since this huge increase, property prices have not been correcting at the same pace of the pump that happened in the late 2000s and early 2010s. The ever-increasing demand for housing using money that people do not have, did not allow the market to recover. This was all made possible by the subsidized housing loans of Isken bank.
What is even more surprising is that it is not uncommon to find almost empty buildings and apartments in incredibly expensive real estate areas, most notably areas of Metn, Beirut and Greater Beirut. Real Estate developers were provided with easy loans, from which they were able to build huge projects, that only get half or less than half filled but were more than enough to turn over their investment and generate profit. Consequently, Beirut and coastal Lebanon were turned into a sea of concrete, with little to no green space. This concrete jungle is filled with unmaintained buildings. They were obviously built with cheap material for the purpose of retail for the consumer and as an “investment good” for the real estate developers. The downfall and the unaffordability of the real estate sector was not only ensued by how gravely the government subsidized it thanks to the fiat monetary system in place, but it was also directly affected by the inflationary nature of fiat money itself. Houses and land were not only bought to satisfy their intended need for shelter, but they were also bought to satisfy the need for storing value. The fact that people earn money that keeps losing value against major commodities led to an increase in the demand for real estate property. This and rent controls also led to an increase in rent prices of new real estate houses.
The rent control law in Lebanon, forced real restate owners to put a ceiling on their rent prices for what is called “old rent”. The government forbade real estate owners to increase rent prices post hyperinflation of the lira that was ensued by the civil war that ended in 1990. Rents were fixed on the prices of pre-hyperinflation; hence people were renting apartment and houses for virtually no cost at all. In consequence, landlords had no incentives to maintain the buildings throughout the years and even some of them were not maintained after they got ruined by the war. Walking around Beirut you can still find buildings with bullet holes all over them and many buildings even collapsed. Moreover, the old rent controls led to a further increase in the prices of the new rents. In a way, a big chunk of the supply of housing were simply removed from the supply of the real estate market and the demand was all dumped on whatever new buildings are being built.
Subsidizing housing in Lebanon did not only make it even harder for people to buy houses and satisfy their basic shelter need without getting into a lifetime of debt but it disrupted thousands of years of development of housing architecture that previous civilizations and generations were striving to maintain. While the natural order of progress and development was made possible by people engaging in the free market trade and competition which pushed them to further lower their time preference, the subsidies and meddling of state came in to increase the people’s overall time preference which was translated into ugly so called “modern” buildings that just satisfy the consumerist nature of modern men, instead of satisfying the actual need for shelter and a prosperous life in a home that allows humans to meet their potential. It is safe to say that the fiat monetary system ruined the Lebanese traditions, it put an end to sustainable living in beautiful stone houses and replaced them with concrete prisons where the entire house and family experience has been reduced to few walls and complete detachment from nature.
Time Preference Series