The housing problem rightly deserves the media attention it is getting. Housing is a basic need and people who are forced to go without this commodity are at risk of contracting a serious disease or death.

Recently, published a front page story, ?Government is failing on housing?. The article was inspired by a report in the previous day?s paper that referred to a rental unit going for $32,000 a month. Clearly a rent of this size ? which amounts to $384,000 a year ? could only be paid by an obscenely rich individual or by one of the giant global corporations that are serviced by our banks, legal, accounting and real estate firms.

However, even allowing for all possible qualifications, we can be certain that the current rental market is a realtor?s paradise. The report in the Daily immediately brought the inevitable response about the greed of landlords. Yet, the capitalist system that we so proudly espouse is based on ?Greed?. According to Adam Smith, author of ?The Wealth of Nations?, it is the greed of the individual that makes the price system perform its magic. That magic is efficient allocation of resources and incomes. It is well to note here that the operative word is ?efficient? not ?just?.

How does the price system work? In the case of rental housing, the basic elements of the price system are the supply of dwelling units, the demand by households and the price which equates the two.

In a typical scenario, in which the general level of rents is increasing, the total number of households desiring a dwelling exceeds the number of dwellings being offered for rent at prevailing rents. Householders recognising that the dwelling units they can afford are scarce, agree to pay higher rents than they are desirous of paying. Landlords, recognising that their rental activity is yielding larger and larger profits, will either build additional rental units or upgrade existing units in order to increase their rental income. A few, particularly at the higher end of the market, will actually rent the dwellings in which they reside in order to further improve their earnings.

This cycle, higher rents, higher rental income and increases in the number of dwellings, continues until the surge in demand that started the cycle is satiated. At this point, which economists call equilibrium, there is no unsatisfied demand for dwellings and no excess supply. At this so-called equilibrium as I have described it, all is not necessarily well. Some households may have obtained a dwelling by doubling up, others have occupied substandard housing and still others are ?living on the streets?. These persons are not likely to have a demand for housing, in the sense that they are able and willing to pay the going rent for accommodation. However, they have a basic need for adequate shelter.

Yet, equilibrium can be reached without their rental status changing. Further, if these households are facing competition for shelter from foreign workers who are also prepared to double up ? not because of need but in order to accumulate funds to send back home ? then the situation for Bermudian households at the lower end of the income scale becomes untenable. The problem that needs to be faced is that everyone has a need for adequate shelter but not a demand.

Demand implies that people wanting shelter can afford such shelter. However, all households have a need for housing whether or not they can afford the going rent. Equilibrium does not mean that everyone who needs a dwelling will be able to obtain one.

When rents are rising, it means that there are more households desirous of obtaining a dwelling unit than there are dwelling units available. Hence, rents are bid up until there is no household left that is willing and able to pay the going rent, who is also without a dwelling.

A solution is three pronged: reduce demand, increase supply, and stabilise prices. Reducing the demand for housing can be accomplished by controlling the number of households added annually to the total of Bermuda households. The pressure on dwelling units comes from two sources ? Bermudian households and non-Bermudian households.

To the extent that Bermudian households are increasing, this is due to a continuing decline in the size of Bermudian households due to falling fertility rates, the decline in multi-family households and buoyant incomes.

The increase in the foreign demand comes from permit workers who are trying to accumulate funds to send back home. Because the foreign worker component of households is very large, Bermuda can make a significant impact on the growing demand for housing by restricting the growth in the numbers of imported workers to a rate of growth that is consistent with the annual growth in dwelling units over and above the number required to house Bermudian households.

Such a policy decision would slow down the rent increases and still provide a satisfactory income for landlords. In this scenario, Government would enter the market only to provide dwellings for those households who do not earn enough to compete with the imported workers in the market for rental units.

If we do not recognise the essential difference between housing needs and housing demand, we will not appreciate that the solution to the housing crisis is to restrict the annual additions to the household market through the importation of workers. Politically, this will be difficult since the imported workers, either directly or indirectly, are in Bermuda in response to the boom that has been generated by the international finance sector. However this approach is more sensible than trying to control rental increases at a level that is below what the market is dictating. The net effect of a rent control policy can only be to reduce the number of dwellings available for those most in need.

I believe that an effective housing policy should follow these guide lines. Government should:

1. Limit the rate of growth in the number of new permit workers to a rate that does not exceed the expected growth rate of new dwellings.

2. Leave the rental market unfettered by controls.

3. Provide dwellings only for those persons whose incomes are insufficient to compete in the housing market.

If the problem is approached along these lines, I believe that an effective solution to the housing crisis will be forthcoming. We need to remember that a solution will be forthcoming whether or not the Government acts. Eventually, the cost of setting up a company in Bermuda and of providing service support for that company will be too high and would-be international companies will set up elsewhere. In addition, some resident companies might also leave.

A mass exodus of International companies would cause rents and house prices to plummet. This might bring temporary succour to those in the lower income categories. However, unemployment will rise; incomes will fall thereby offsetting any respite that the lower income groups might have achieved.

Given these circumstances, we can expect crime to skyrocket to the extent that Americans will not need their government website to tell them not to visit Bermuda.

The choice faced by Bermudians is to initiate a crash programme to provide affordable housing earmarked for those households living in the lower income categories. Or Bermuda can continue to drag its feet in addressing the crisis thereby stimulating the socially unsettling conditions that may have already taken root. Unfortunately, given some of the negative social behaviour we are experiencing increasingly, it may already be too late.

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