What will happen in Romania if we add eligible persons to “Prima Casa” without having the necessary funds

Part 2

(to read part 1, click here)

On Thursday I explained to you what happened in Greece, once the politicians started spreading money to people, multiplying the number of eligible people for every category of State aid. Today let us check what will probably happen in Romania, if the country increases the number of eligible people for “Prima Casa”, without having the necessary funds to support this action.

A nice idea, which sounds “super” in people’s ears
The idea is nice. “Prima Casa” helps young people to buy their homes. So far we have been helping the ones who don’t have a property. But there are also other young people with properties, who could also benefit from this programme. Then why not to include them as well?”

So with the same funds, more eligible people. Ok, I agree and I can add more ideas: Why only to this part of young people? Why not to more youngsters? But why only to younger citizens? Older ones have rights too. And why not to everyone after all? Following this strategy, even more persons will be helped. And like this we reach one step closer to the “ideal” society, where the State helps everyone. (yeah and I am Theodoros Kolokotronis, the famous Greek general, ready to lead my army to battle…)

This sounds “super” in people’s ears. But how close is it to reality?

Money is not enough…
“Prima Casa III” has a budget of just 200 million Euro. Why is that? Most probably because the State can not support a higher amount, or because they try to bring the banks back to the real economy (as they should do).

But this amount is not sufficient to cover the actual demand. We would need about 600 – 800 million Euro, in order to match with the potential demand by eligible applicants today. Some people say that not even 1 billion is not enough.

Let us agree that this is unfair. But this is the reality. Money is not enough, we can not cover the demand for such loans. So what do we do?

More eligible people in a programme without money: Perfect scenario for bubble, blackmails and tragedies…
Let us assume that tomorrow morning we add another 300.000 people in the category of eligible applicants for “Prima Casa”. Once they hear it, some of them will start searching the market as well, in order to benefit from this new measure. This leads us very fast to the following steps:

• An artificial demand will be created. People will ask for loans to buy 800 million, while the programme pays for 200. But before they will be rejected, they will go around, ask for properties, agree with owners, search for solutions. This will create an artificial demand, leading the market players to believe that “the market has changed, the demand for properties is huge again”.
• Prices will rise, due to artificial demand. We all know that there are too many people out there, waiting an excuse in order to raise the prices, without caring about tomorrow. This artificial demand will give them the perfect excuse to do so. They will have 10 potential clients for a property, so they will ask for more money. They won’t care for the fact that just one or two of the interested persons is a real client.
• People will panic, trying to apply first, before the money ends. Once we put too many people in the game, without increasing the available sum of money, we will just create panic and chaos. People will be running, trying to apply before the money ends.
• Artificial demand + prices rise + people panic = Mistakes, tragedies, regrets. When we are in a hurry, we usually make many mistakes, accept to pay unjustified costs and don’t pay attention to details. This leads to wrong investments and regrets afterwards. Some few people will be laughing (again) and many more will be frustrated (again).

Do we really need all these?

Another scenario:

Too many categories of people for the same amount of money: Less money / application.

Result: Price decline, many unfinished deals
Except the above mentioned scenario, there are more to talk about. Another one is the following:

• The State adds too many people in the eligible list.
• Then it realizes that it should reject the majority of applications.
• In order to avoid this, it approves almost all, but reducing the financed amount. For example, not 60.000, but 35.000 – 40.000.
• So this means that: Either the buyers will pay the difference (most of them can not, so “Prima Casa” will end up to be “bye bye Casa mea”)
• Or the prices of properties will fall, in order to adjust to the new standards of financing (sending the message that the prices used to be artificial and they should fall even more).

So, either we will end up with many unfinished deals, or we will see prices declining. Do we want this version as well?

A simple (unpopular, but realistic) solution: Keep it easy and clear!

• Do we have more money? We can add it to the existing sum and cover more applications.
• We don’t have enough resources? No problem, announce it and finish with this.

Why do we need bad surprises? It is much better to keep this programme easy and clear. The number of eligible applicants today is by far higher than what the State can support, so you don’t need more people to enter.

Send a message: Stability.
The best message to a market is to inform it that we have stability. That a decision is made and this is it. If we create expectations, we just maintain a false situation which will cost to the society (and economy) much more than the help it might provide to politicians.

“Prima Casa” is not bad at all. Keep it clear and simple.

And once you have resources, create whatever else you desire. But, please, don’t rise expectations that you can not fulfil…