Europe has a game plan and real estate is part of it, writes Michael MacBrien
At one level, land and the built environment are eminently local affairs falling to local government. In federalised countries, housing policy, planning and other fields closely associated with property are sure to be devolved. But at the same time construction, real estate and the property professions are 10-12% of any national economy, so practically everything impacts real estate.
And that’s how the EU got its property foothold – via business, industrial, environmental, energy, agricultural and social policies with real estate fallout. Free circulation of capital meant freedom to invest in real estate anywhere without hindrance; freedom to provide services meant that property professionals could offer their services anywhere they wanted. Property was massively caught up in the passage of environmental, energy and climate action policy from national to EU level, and now all country efforts are founded on a bedrock of EU requirements.
And yet, until just yesterday you could have argued that none of this was fundamental because nation states remained in charge of the key aspects of political, social and economic life – taxation, social spending, economic and monetary policy, all of which is high impact for real estate. Even the advent of the euro didn’t change this because all that Europeans really gave themselves were the trappings of a currency without the economic and budgetary underpinnings.
But the crisis showed that up for what it was and in the end the choice for Europeans was clear: ditch the currency or start behaving like a country. To the chagrin of so many punters, they’ve chosen to stick together and stick it out. In so doing, the EU is morphing into a completely new animal and for real estate it’s a whole new ballgame.
Europeans now have a mean, lean way of getting things done: the ‘European Semester’, when euro-zone and ‘pre-in’ finance ministers and heads of government gang together and tell each individual country what to do – or else. Almost all countries are under constraint and euro-zone states can be fined 0.1% of their GDP if they don’t get their house in order.
Why put up with that? Because we now all know that the failure of one small country can spook the markets and drag everybody down. So European governments rely on their common civil service (the European Commission), counselled by all that is grandest in the field of economic policy, to inform their decisions on what to do collectively and individually to stay afloat. Once they agree on that it becomes the Tables of the Law, reviewed annually. Often it serves as convenient cover for governments that want to reform but fear the street.
How does that work for real estate? Collectively, it results in: shifting taxation away from labour towards taxation deemed less detrimental to growth like high-value property taxation; choosing tax composition deemed least distortive to growth, such as property tax; rebalancing housing taxation away from transaction towards recurrent taxes; reducing tax relief on mortgage interest and capital payments, considered to have contributed to the increase in housing prices and debt leverage, and therefore to the housing market bubble.
What we see is that housing policy, property taxation, rent (de)regulation and valuation are fundamental to the health and stability of the entire economy and that economy is now European, with all euro-zone and ‘pre-in’ countries now minding each other’s real estate business.
Then there’s the reorganisation of European financial markets with real estate fund managers caught up in AIFMD, and Banking Union, a task of Pharaonic proportions being carried out in record time with immense property-market impacts.
The proportion of their capital that banks are allowed to lend against real estate and the conditions under which they can lend are the most obvious property-related repercussions of a shift in banking regulation and prudential control from national to European level, which extends to European authorities being able to walk in and shut down a bank. The same goes for consumer protection; witness the European Court of Justice’s empowerment of local Spanish courts to review the conditions imposed by Spanish banks in the event of default on mortgages.
This is part of a broader effort to marshal all EU policy for the headline goal of a stable and sustainable economy. For real estate, a prime example is the buildings component of climate action.
The EU didn’t wait for the crisis to create the world’s most ambitious and coercive legislation for the energy efficiency of the building stock, but all that is now mixed in with the European employment and growth policy so badly needed to offset all the euro-austerity and give people a positive horizon. Europeans agree on prioritising green growth, green jobs and a low carbon economy, and with buildings making up 36% of the total carbon footprint, the great debate right now is how to go beyond the current energy performance renovation and certification requirements and stimulate the economy by doing what it takes to reduce the building footprint by 40% by 2030 and 80% by 2050. The debate now is about setting binding targets on member states to ensure that the goal is reached.
There’s just one thing missing: democracy. Especially in times of crisis and recession, people need to know they can hire and fire those who manage their pain. In its stumbling, bumbling way, the EU is rising to this challenge as well. The European Parliament is using its power to good effect and jostling for more, and it looks like in next year’s elections the European parties in sync with their national components will each present a candidate for President of the European Commission. Debate has also begun about involving national Parliaments directly with doubtless more to come as this amount of power pooling demands accountability. That all this should run in parallel with the Europeanisation of real estate policy is no coincidence. Property is at the heart of political life.