The Unassuming Economist

Global Housing Watch Newsletter: September 2018

Why social responsibility matters for urban revitalization? How does a developer provide city center affordable housing? How can a developer involve the community in a urban revitalization process? What challenges do developers face? These are some of the questions that Keyes Christopher “KC” Hardin tackles in this interview. KC is the co-founder and CEO of Conservatorio SA—a real estate development company based in Panama City, Panama. He is also a Fellow of the Aspen Institute’s Central American Leadership Initiative, and a Research Associate at MITs Community Innovators Laboratory.

The company…

Hites Ahir: What is Conservatorio SA and what does it do?

KC Hardin: Conservatorio SA is a real estate development company dedicated to sustainable urban revitalization. We started Conservatorio SA fourteen years ago to fix up a couple of historic buildings in Panama City’s UNESCO Heritage site, and it’s grown into a company that builds just about every category of product you can find in a downtown—hotels, condos, offices, multi-family, even cultural infrastructure like theatres.

We call our brand of real estate “sustainable urban revitalization” which is basically mixed-use, mixed-income urban core redevelopment with a heavy social inclusion component. Within all those categories we also build just about every level. We have hotels that are $17 US dollars per night and hotels that are over $300 US dollars. We build apartments that sell for $80,000 US dollars and others for $2 million US dollars. All within a few blocks of each other. We tend to hold on to commercial property for the long-term but we like to sell apartments because it allows us to recycle capital and we think that neighborhoods work better when people have a chance to own their own homes.

Hites Ahir: Why social responsibility matters to Conservatorio SA?

KC Hardin: On a personal level, I grew up in Miami until the 1990s and then in New York until 2003. For whatever reason I was always in neighborhoods that were either revitalizing or deteriorating.  So, I had a sense for the good and the bad of an urban revitalization cycle. I saw how much better cities worked when their cores became vibrant and safe, but I also came to understand that there was a question of “better for whom?” So Conservatorio SA was founded on the question of whether it is possible to have the good of urban revitalization while minimizing its two big negative externalities: displacement and cultural homogenization.

That question has taken us down a long road of learning how to balance our responsibility to capital with our responsibility to community. Along the way we’ve picked up what I think is a pretty deep understanding of the mechanisms of social and economic exclusion, the long-term value of authenticity and how to co-create with communities.

The historic district of Panama City…

Hites Ahir: How has Casco Viejo and the surrounding area evolved over the years?

KC Hardin:  The Spanish laid out Casco Viejo’s fantastic street grid in the 1500s, and it has been transforming ever since, through numerous booms and busts. As Panama most recently boomed in the 2000s, Casco Viejo lagged the rest of the city. I think this is because very few investors understood how revitalization works back then. When we started Conservatorio SA in 2004 more than 80 percent of the building inventory was unrestored, there were four gangs that controlled the district, and raw sewage leaked onto the streets, just to name a few issues. But there were preservationists who fought hard to protect the area, and pioneers who started reigniting it culturally.  It is now able to support a very high quality of life, and is a point of pride for the country.

Hites Ahir: What has happened to house prices?

KC Hardin: Housing prices have risen from being about 30 percent lower than the best parts of the city in 2007 to being about 30 percent higher now. I think that premium is due to limited supply, higher construction costs, and a unique lifestyle that doesn’t exist in other parts of the city. On the rental side, the change has been even more dramatic because it has gone from a neighborhood where most people lived in condemned buildings paying little or no rent to one of the city’s most expensive. So, in terms of relevance to the city and pricing, the neighborhood has gone full cycle from its last peak in the 1950s.

But that revitalization has come at a human cost because much of the population that moved in during the decline was not given a real opportunity to stay. There was a direct tension between public policies designed to restore heritage and create economic growth on one side, and the social need of preventing widespread displacement on the other. There were well-intentioned but isolated efforts to balance these tensions but going forward we need better public policy and a deeper understanding of the long-term value of authenticity in the private sector.

Hites Ahir: How do you go about providing affordable housing in the area?

KC Hardin: Conservatorio SA has an internal policy of building one affordable housing unit for every high-end unit. We keep them affordable by keeping them compact, making parking optional, and sharing social areas and other amenities among several adjacent buildings. In many buildings, we mix market rate with affordable, so there are often a few units where the price is subsidized by those market rate units. There is also a government subsidy on interest rates for apartments that are under $120,000 US dollars, which helps keep the monthly payment affordable. For example, the monthly payment on a two bedroom can be as low as $380 US dollars, meaning that it is affordable for a minimum wage couple. That still leaves out a lot of people in our community so we need the government to address this gap.

Building an inclusive neighborhood…

Hites Ahir: What are some of the social projects that you have implemented to help, and involve the community?

KC Hardin: Besides building affordable housing, our primary social mission is to nurture an eco-system of social and economic inclusion programs. We believe that homeownership is a critical determinate of social outcomes, but we have learned that in historically marginalized communities the opportunity to buy, or even to move into a formal rental, no matter how affordable, is a very high rung on the ladder for many people. So investment in human development is the other key to minimizing displacement.

We invest in programs that address a multitude of interrelated problems like violence, teenage pregnancy, education, and poverty. We have also learned that all of those problems are just symptoms of a dysfunctional system. To create any sustainable change, those programs have to be tied together with a larger process of community organization, and empowerment that will hopefully push the community back into balance over the long-term. To help that process, we worked with the Community Innovators Lab at MIT to create a leadership development program called LiderazCo, which is short for “Leaders who Co-Create Community”.

Hites Ahir: If you had to pick one social project that has had the most significant impact in the district, which one would it be?

KC Hardin: Resolving gang tensions was critical. We invested heavily in a program to integrate gang members into the broader community. The outcomes at the individual level varied widely, but I think it had the effect of not only reducing violence, but also changing perceptions in the public and private sector about what was possible. In Latin America there is a strong bias towards repressive policies towards gangs that is probably counter-productive in the long run, so one of the program’s goals was to build bridges between sectors that don’t normally connect.

Hites Ahir: In your drive to build inclusive city center housing, what are the top three challenges that you are facing?

KC Hardin: I see three big challenges for inclusive housing. First is antiquated zoning that requires expensive parking and generally encourages lower priced detached housing out on the periphery of the city. The rules are conceived around an ideal of city center apartments for middle-to-upper income nuclear families who have two cars and two incomes. That leaves out a lot of people and makes it hard to innovate with new housing models, though lately the city has been receptive to proposals.

The second problem is a strict bank financing criteria that generally filters out people who are self-employed and those who are in the informal economy.

The final challenge is the high degree of marginalization in our society. The lack of investment in human development has made it extremely difficult for a lot of people to break into the formal economy, especially here where the big job growth is in the service sector.

What is next?

Hites Ahir: What is next for Consevatorio SA?

KC Hardin: In terms of lines of business, we are rapidly pushing further into bottom-of-the-pyramid, urban core housing solutions. We feel that affordable, multi-family housing with imbedded social services can be a profitable, and a key step in the ladder to equity. We are also working with our academic partners on some interesting commercial models around formalizing informal commerce. Geographically, we are now in Honduras and want to create urban core-focused joint ventures with like-minded developers throughout Latin America.

On cross-country:

• Affordable Housing Governance and Finance: Innovations, partnerships and comparative perspectives – Taylor & Francis Group
• Housing & Migration – A Research Briefing – Housing Europe Observatory
• Affordable housing in Europe: how do the various member-states do it? – Housing Europe Observatory
• “Investing in affordable housing comes with a high return both socially and financially” – Barcelona City Council
• Housing Europe supports the Municipalist Declaration of Local Governments for the Right to Housing and the Right to the City – Housing Europe Observatory
• Can Housing Be Affordable Without Being Efficient? – World Resources Institute
• These May Be the World’s 10 Riskiest Housing Markets – Bloomberg

On the US:

• Ben Carson and HUD Get Ready to Take On the Nimbys – Bloomberg
• Mapping the boom in nonbank mortgage lending—and understanding the risks – Brookings
• Is the housing price-rent ratio a leading indicator? – Federal Reserve Bank of St. Louis
• Americans are now better off renting than buying. Above all, avoid buying in Dallas! – Global Property Guide
• Rental Glut Sends Chill Through the Hottest U.S. Housing Markets – Bloomberg
• Mortgage Fraud Fueled the Financial Crisis—and Could Again – Institute of New Economic Thinking
• Voters Can Keep Housing Affordable – New York Times
• Book Review: High-Risers: Cabrini-Green and the Fate of American Public Housing – The New York Review of Books
• The Financial Crisis Changed Home Buying Forever – Wall Street Journal
• Preserving Affordable Rental Housing – MacArthur Foundation
• The Housing Bubble Burst All Over Reality TV – New York Times
• Maryland’s Biggest County Responds to Full Schools by Halting New Housing – Slate
• City NIMBYS – Furman Center for Real Estate and Urban Policy

On other countries:

• [Australia] Chinese real estate investment in Australia drops by nearly 30% – Macro Business
• [China] How Much Would China’s GDP Respond to a Slowdown in Housing Activity? – Federal Reserve Bank of Kansas City
• [Iceland] Iceland’s house prices continue to rise, albeit at a slower pace – Global Property Guide
• [Ireland] House prices in Ireland continue to rise at breakneck speed – Global Property Guide
• [Portugal] Portugal’s housing market remains robust – Global Property Guide
• [Portugal] Qué son las “visas doradas” y por qué causan polémica en Portugal – BBC
• [Romania] Romania’s house price growth decelerating sharply – Global Property Guide
• [Spain] The financial transmission of housing bubbles: Evidence from Spain – VoxEU
• [Spain] Te presentamos a tu casero: se llama Blackstone y es dueño de medio Madrid – GQ
• [Sweden] Sweden’s house price boom is officially over – Global Property Guide
• [Switzerland] Holes in Swiss property market ring mortgage alarm bells – Reuters
• [Thailand] Thailand’s house prices rising strongly again – Global Property Guide
• [United Kingdom] Housing affordability: Is new local supply the key? – Sage Journals

Photo by Aliis Sinisalu

The IMF’s latest report on Austria says:

“The Austrian housing market has shown a strong trend rise in valuations over the last decade, mainly driven by price increases in Vienna. Prices stagnated through the mid-2000s
but have since outpaced most of Austria’s EU peers. In September 2016, the ESRB issued Austria a warning on medium-term residential real estate vulnerabilities because of the robust price and credit growth and the risk of further loosening in credit standards. Recently, price growth moderated to 4.7 percent (y/y) at end-2017, due to a slowdown in Vienna, though prices accelerated in the rest of the country.”

While the robust price growth has largely reflected underlying market fundamentals, the nationwide market has recently started to show signs of modest overvaluation. Housing demand has been buoyed by demographic factors, including the spike in immigration in 2015–16, and low interest rates which also have increased the attractiveness of housing assets as a form of saving. Supply-side constraints, such as land availability, have also played a role, despite some recent pickup in construction activity. The OeNB’s fundamentals indicator for residential property prices suggests a modest overvaluation of around 10 percent for Austria in 2017 (and a larger overvaluation for Vienna of about 20 percent), broadly corresponding to a range of ECB indicators as of end-2017.

Real estate related financial stability risks are nonetheless contained. The rise in mortgage debt in Austria has been modest compared to other EU countries experiencing large property price increases, and its share relative to households’ incomes has remained stable and among the lowest in the Euro Area. Residential real estate exposures account for only about a fifth of Austrian banks’ total loan stock and about 150 percent of consolidated CET-1 capital. Furthermore, the prevalence of rental accommodation (about half and three-quarters of housing nationwide and in Vienna, respectively) shield a large share of the population from adverse price developments. Less than half of homeowners have outstanding mortgages, and they also typically have higher incomes and net wealth relative to the rest of the population.

 

Some pockets of vulnerability and early signs of increasing risks nonetheless warrant continued close monitoring. The share of foreign exchange denominated housing loans at around
15 percent remains high relative to Austria peers, although it has declined significantly in recent years. Furthermore, the recent prolonged period of low lending rates saw a significant increase in the share of variable interest rate mortgages, which despite a recent decline still amount to about three-quarters of the total stock. There are also signs of some easing in banks’ lending standards, with a rising—albeit still limited—share of relatively high loan-to-value, debt service-to-income, and debt-to-income ratios in new housing loans to households.

Supply side measures could help ease the modest price imbalances over time, while the recently expanded macroprudential toolkit can help prevent a build-up of systemic risks.
Measures to address supply-side constraints could include reviewing zoning regulations and other restrictions on construction. Addressing outdated property tax valuations could help improve residential mobility and market efficiency. At the same time, the new real-estate specific macroprudential policy tools provide additional scope for tailored preventive measures to ensure systemic risks arising from the mortgage market remain contained. These are accompanied by new reporting requirements, expected to be introduced in 2019, to facilitate evaluation of risks and impact of potential policy changes. They also complement a 2016 call by the Financial Market Stability Board for the Austrian banks to maintain sustainable lending standards, although the guidance does not specify quantitative limits for the vulnerability ratios.”

 

The IMF’s new report on Portugal says:

“Housing prices continue to increase, but there is no significant overvaluation yet. Following a decline of 18 percent in real terms over 2010–13, housing prices have since increased by
about 20 percent in real terms (7.9 percent in 2017), especially in Lisbon, Porto and the Algarve region. While the increases have been driven largely by transactions on existing dwellings by non-residents, the share of housing transactions financed by Portuguese mortgages has been growing since 2015 (reaching 41 percent in the last quarter of 2017). Estimates in the ECB’s May 2018 Financial Stability Review suggest that there are incipient signs of overvaluation in the residential real estate market. The authorities should continue to improve the quality of real estate data and related analytical tools, and to monitor mortgage markets and the evolution of risks to banks from developments in real estate markets.”

On cross-country:

• Global developments in residential property prices – first quarter of 2018 – Bank for International Settlements
• Hypostat 2018: recent developments in housing and mortgage markets in Europe and beyond – European Mortgage Federation
• The effect of house prices on household borrowing: A new approach – VOX
• Global luxury house prices: performance in 2018 so far – Knight Frank

On the US:

• The story of a house: how private equity swooped in after the subprime crisis – Financial Times
• Measuring Gentrification: Using Yelp Data to Quantify Neighborhood Change – NBER
• Liquidity vs. Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession – NBER
• Lessons from the financial crisis: The central importance of a sustainable, affordable and inclusive housing market – Brookings
• Three ways to strengthen the affordable rental housing supply – Urban Institute

On other countries:

• [Australia] Australia’s property boom ends as credit squeeze begins – Financial Times
• [Brazil] Can Housing Be Affordable Without Being Efficient? – World Resources Institute
• [China] China struggles to heed Xi’s call to develop rental housing – Financial Times
• [China] Housing Affordability in Urban China: A Comprehensive Overview – SSRN
• [Hong Kong] Hong Kong’s hot property sector show signs of cooling – Financial Times
• [Hong Kong] Hong Kong’s Runaway Property Market May Be Heading for a Fall – Bloomberg
• [Netherlands] Netherlands’ housing market remains strong – Global Property Guide
• [United Kingdom] History Dependence in the Housing Market – Centre for Economic Performance
• [United Kingdom] London housing: the bearish Brexit take – Financial Times
• [United Kingdom] Can house prices teach us anything about schools? – BBC

Photo by Aliis Sinisalu