Last year, Chávez extended the Law on Fair Costs and Prices to rental housing. Previous rent controls and limits on private investment had reduced the stock of rental housing by as much as 70 percent in only a few years. The acute shortage of rental housing led to skyrocketing rents in the black market and a lot of social unrest. Chávez decided that tougher rent control was needed. In November the government decreed that rents could not exceed a specified percentage of a property’s market value. The property value, of course, would be determined by the government’s Superintendency of Fair Costs and Prices. The housing shortage can only get worse.
In response to the growing housing shortage, the government decided to help increase the housing stock. It’s goal is to build 3 million homes by 2019. But rent controls make new construction unprofitable and conventional financing unlikely. So the government recently enacted a mandatory loan program that fixes mortgage rates at very low levels: 4.33 percent for low-income borrowers and 10.66 percent for high-income borrowers. In an economy with inflation running at nearly 25 percent a year and rising, this is the epitome of free money. Naturally, no private bank would want to make such loans. But the new law requires banks to devote a significant portion of their loan portfolio to these mandatory mortgage loans.
Venezuela’s attempt to repeal the law of supply and demand and replace it with pervasive price controls has been an economic disaster. The destruction of profit, investment and work incentives has stymied economic growth. The government and the economy have become increasingly dependent on a diminishing stream of oil revenue. Without that oil revenue, the Venezuelan economy would implode.
Chávez’s death has sparked hope of an economic restructuring that would reduce government regulation and encourage private enterprise. But that will not happen any time soon. Chávez’s handpicked successor, Nicolas Maduro, must win the hearts and trust of the people. As Chávez himself learned on several occasions, rescinding price controls and embracing “capitalistas” is not the way to accomplish that goal.
Brad Schiller is emeritus professor of economics, American University.