Namibia is in the grip of a housing shortage. With the
ruling party Swapo having established a special committee to address the
provision and availability of housing and serviced residential plots, it has
certainly become a governmental priority. Unfortunately, rumours abound that
this government intervention will not focus on addressing the issue of supply,
but rather on the price of property around the country.
And prices, unfortunately, is the mechanism whereby buyers
and sellers maintain equilibrium in a market, i.e. where the amount supplied
equals the amount demanded. When there is a shortage of the quantity supplied,
prices increase, incentivizing more people to sell, while simultaneously
reducing the demand due to decreasing affordability.
This can lead to cries that a price is ‘not fair.’ But
fairness is not an objective standard – ask any two people what they think is a
fair price for an item, and you’ll get different results. Yet by applying
pressure to their elected representatives, they encourage a government
intervention. And with a shortage of supply, it often seems like high prices
are simply price gouging by the sellers.
An attractive solution to this ‘price gouging’ is to impose
price controls. Yet when there is a shortage of supply, price controls only
exacerbate the problem – increasing demand and reducing supply – and have
numerous adverse consequences. This is not only a prediction of basic economic
theory – it has a long empirical history as well.
Price controls were first tried about four centuries ago.
The Egyptian Pharaohs, attempting to prevent famine, established price controls
on wheat. With no profit motive, farmers began producing less and less, until
one day, they simply left the farms, unable to make a living off them. The end
result? Famine set in, the economy collapsed, cities were abandoned, and the
reign of the pharaohs ended.
And in a famous example, the Roman emperor Diocletian
implemented price controls in the third century CE. Of it, Lactantius describe
the end result that "much blood was
shed for trifles, men were afraid to offer anything for sale, and the scarcity
became more excessive and grievous than ever. Until, in the end, the law, after
having proved destructive to many people, was from mere necessity
abolished."
Every time over the successive two thousand years that price
controls were implemented, the promises remained the same. “Everything will be
cheaper.” And every time the results have been quite predictable: Shortages.
And all the ills that follow with it – the destruction of capacity in the price
controlled industries, and a commensurate drop in the quality of its product. Of
course, with property, there will be an additional economic shock – the
collateral on home loans will vanish. With banks over-exposed, lending will be
curbed dramatically, resulting in Namibia’s very own credit crunch, if not the
outright collapse of our financial institutions.
And the incentives to evade these controls will be
ever-present, and their forms numerous. Tie-in sales is only the most obvious
example. Attempts to curb evasion will cause an expansion of government
oversight and enforcement – not only expanding its bureaucracy and increasing
its costs, but also allowing more opportunities for bribery and corruption. And
since any bureaucracy expands to meet the needs of the expanding bureaucracy,
specific price controls will eventually expand into general price controls.
Namibia only has to look to Venezuela to see the catastrophe
that price controls bring to an economy. Nobel prize winner Milton Friedman
said: "We economists don't know
much, but we do know how to create a shortage. If you want to create a shortage
of tomatoes, for example, just pass a law that retailers can't sell tomatoes
for more than two cents per pound. Instantly you'll have a tomato shortage.”
As they say in the medical community, “Treat the
cause, not the symptom.” Our high property prices are a symptom. Perhaps we
should rather be focusing on the cause.
