Real estate’s Prometheus unbound: Part 2, fast revival?

February 22, 2012 | Communism, Cuba, Development, Entrepreneur, Global news, Havana, Homeownership, Markets, Property rights, Redevelopment, Rent control

[Continued from yesterday’s Part 1.]

 

By:David A. Smith

 

In yesterday’s post, via a New York Times article oblivious to the implications of the phenomena it was reported, we swiftly recapitulated Cuba’s half-century of economic failure, as visibly seen every day in Havana’s decaying properties.  Now that decay has finally reached its ending point, both political and real estate, with Fidel Castro’s resignation from office (April, 2011) and the ascension of his brother Raul, who seems to be tacitly repudiating what his brother stood for:

 

A new property law that took effect on Nov. 10. allows Cubans to buy and sell their houses and even own a second home outside the cities.

 

The measures are President Raul Castro’s biggest maneuver yet as he strives to get capital flowing on the island, encourage private enterprise and take pressure off the economically crippled state.

 

Raul, not Fidel.  Sic semper tyrannus Fidelis?

 

What will he do when he’s in charge?

 

Behind scruffy porticos and walls of bougainvillea, the wheels of the property trade are turning.

 

Cuba may be embarking on an important experiment in economics: after five decades of capital destruction, how quickly can the economy be revived?

 

Unofficial brokers (who are still outlawed in Cuba) say they have never been so busy –

 

An edifice of authoritarianism cannot be discorporated overnight.  Instead its stones must be dissolved one by one, almost like political dominoes.  If properties can be bought and sold legally, why should it be illegal to help people buy and sell them?  That logic will win if the market is given half a chance to flourish.

 

– trawling the streets and the Internet for leads and fielding calls from prospective buyers.

 

Amazing, isn’t it, how the instant that people have a chance to improve their lots, money emerges from its bunkers, activity commences, and markets spring up.  You can improve your property!  You can improve your life!

 

In need of improvement: Havana, 2011

 

Cubisima, an online classified service, said the number of hits on its real estate page tripled to an average of 900 per day after the new property law took effect on November 10.

 

Only two and a half months and already there’s lively activity starting.  Remarkable, isn’t it?

 

It is a crude market, where househunters rely on word of mouth and prices are based as much on excitement as on any clear sense of property values, according to interviews with homeowners, brokers and experts.

 

Naturally, for the market will form only as money floods back in, and almost certainly the early properties will trade at deep discounts from what they will be worth if they are renovated and if the buyers are allowed to keep their profits.  In other words, prices today are discounted for construction risk, market risk, and most of all sovereign political risk.

 

The law … still bars most foreigners from buying.

 

This is entirely understandable – if Cuba has been an economic cripple (no matter that its own government did the crippling), to allow unlimited foreign investment immediately might swamp whatever nascent Cuban entrepreneurialism may be latent in the country.  (As examples of the dangers of instantaneous big-bang privatization, look to Russia right after Yeltsin.)  Still, even if this is a temporary anti-exploitation law, it will have intriguing consequences:

 

Buyers at the top end are mainly Cuban emigres –

 

Something similar occurred in South Africa immediately after full democracy arrived in 1994.  Black economic empowerment laws encouraged or mandated asset transfer to the formerly disadvantaged, and led to practical joint ventures between established large organizations and individuals from the new black elite.  Here in Cuba, such a measure will make winners out of those Cuban emigres, perched in Miami who have long been awaiting the chance to bring themselves and their capital back home and to reclaim their place atop Cuban society.  In effect, Cubanism will become a funnel through which foreign capital flows back into the country. 

 

– and Cubans married to foreigners.

 

There may be more than one marriage of convenience, and that will be the least of the short-term fiddles:

 

I’m single, and available

 

Buyers often declare a fraction of what they pay, and money sometimes changes hands overseas –

 

Naturally, since if I were the seller, I’d want my capital out of Cuba and this is a perfect way to expatriate it, and if I were the buyer, I’d want to have visible to the taxing authorities the smallest price payable.

 

– suggesting that the government’s hope of reaping significant tax revenues may be at least partly thwarted.

 

For the Cuban government, far less important than short-term tax revenues is the encouragement of expatriate Cuban capital to return and rebuild the country.  I believe Raul Castro is betting on an economic Reconquista of Cuba.

 

Communists on the left, capitalists on the right!

 

On a recent day, a stylish flight attendant showed a viewer around the pretty three-bedroom home she hopes will fetch $150,000; a mile away, an elderly widow held out for an offer of $500,000 for her big, unkempt 1950s house — to be deposited in Spain, please.

 

Cubans quite rightly distrust their government.  Given this, their capital will flee outward as through a sieve, but to buy property is to bet on a place.

 

Many sellers plan to downsize, so they can live better or leave.

 

Wouldn’t you?  Especially if you had lived under Castro’s regime for fifty years?

 

Victoria Perez, a retired doctor, put her spacious house and two-bedroom annex on sale last month for $80,000. She hopes to buy something smaller and put aside about $20,000 to live on and visit her daughter in the United States.

 

As we saw some years back, people who live in a place see it in terms of its past; those moving in see it in terms of a potential future.

 

“To earn $20,000 would take 20 years,” she said. “This opens up a whole world of opportunities.”

 

Yes, it does.  Faster, please.

 

Statistics are few, and brokers admit that the curious outnumber the serious. The National Housing Institute processed just 364 sales in the three weeks after the new law took effect.

 

To be sure, as people were unready to  believe the government meant what it said.  The pace of actual transactions will accelerate.

 

“Prices are very inflated,” complained a Cuban-Canadian who was viewing a mint-colored four-bedroom house priced at $240,000 one recent afternoon. He said he would watch the market for a month or two to see how things shook out.

 

The investor is on scene and I am not, but I’ll bet the early movers do extremely well.

 

Can you envision a brighter future?

 

Steep price tags notwithstanding, experts and brokers say there are signs that the better-off are starting to migrate to areas like Miramar, Havana’s embassy district, and build vacation homes on the coast.

 

Certainly they are, especially domestic Cubans who for one reason or another have committed to stay in the country.

 

“There is definitely a rearrangement going on,” said Carlos Garcia Pleyan, a sociologist who worked for decades for the Cuban government’s urban planning department.

 

Carlos Garcia Pleyan

 

Other than Cuban emigres, he said, the gentrifiers were “the winners of the Cuba of recent years.”

 

“People who have made money legally, and people who have made money illegally,” he said.

 

As we have seen, buying property legitimizes profits, no matter how illegitimately gained, even from Somali piracy.

 

“Businesspeople, maybe a restaurant owner, maybe someone who owns taxis, maybe someone who has made money through corruption.”

 

A corrupt regime’s days are numbered when those who made their money out of its corruption start converting capital into a laundered or untraceable form, preferably one insulated from later inflation, and property is an excellent means of doing both.

 

Who knows where the money came from?

 

 “We shouldn’t be worrying so much about how people rearrange themselves,” he added. “We should be asking ourselves how such large social inequalities have happened.”

 

You can ask yourselves those questions after you get your economy functioning again.

 

If anyone needed a reminder of Cuba’s critical housing problem, they got one in January, when a building collapsed in central Havana, killing four people.

 

As we saw yesterday, rent control destroys property.  Hence a rent control regime can last only as long as the lifespan of a building, which we are discovering is no more than fifty years.

 

Miguel Coyula, an architect who specializes in urban planning, said an average of three buildings collapsed in Havana each day, victims of neglect, overcrowding and improvised construction.

 

 

Well over 100,000 people are waiting to move to government hostels.

 

There is the result of an overzealous pursuit of leveling – building themselves are leveled by age and decay.

 

Mr. Pleyan estimated that it would cost about $3.6 billion to build the 600,000 houses Cuba needs, according to the government. Independent estimates are more than double that.

 

Capital starvation carries a high price.

 

Havana, 2001: waiting for an economy to appear

 

The creation of construction and housing cooperatives is one step being discussed.

 

Co-operatives are certainly a good idea, one that will take some fairly considerable work to establish.  People can cooperate economically but need to be taught the better and worse ways of cooperating.

 

Such arrangements would reduce building costs and allow groups of individuals to build, say, a small apartment block.

 

More precisely, these arrangements would enable people to contribute their labor toward the development of multi-story physically sound structures – and hence, they would get the economy moving faster.

 

He and thousands like him need work they can do

 

Such projects will not happen quickly — if at all — and Ms. Martinez feels lucky that she salvaged her home before she and her family had to abandon it.

 

When the final obituary for Communism is written and history’s judgment is comprehensive, to the list of its crimes will be added its remorseless destruction of property, and with it the destruction of cities, economies, and lives.  And as Cuba shows, when the property physically collapses, the political system collapses with it. 

 

Once the roof is on, she said, she would like to get running water in her kitchen, replace the toilet and finish building a bedroom for her teenage son.

 

Communism’s headstones are dead and decrepit buildings. 

 

“I need taps, doors, windows, tiles; everything needs fixing,” she said, looking at the stained walls and rotten shutters of her bedroom.

 

“Little by little,” she added. “Little by little.”

 

Are things brightening?