Real Estate - Property Matters by Afra Raymond
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The property ‘bubble’ — Part 1

Published Thursday 22nd April, 2004

The people who actually produce the properties are themselves having their behaviour changed by the new environment in terms of the appraisal they make before investing in a project.

Deluxe Cinema
For several weeks, workmen have been busy at the Deluxe Cinema site located at the corner of Pembroke and Keate street. No one can confirm exactly what is going to be built there, but entrepreneur Johnny Soong has been seen there on several occasions. Word around town is that a new entertainment centre will replace the old cinema.    Photo: Karla Ramoo

Real Estate Price Increases

This week we move onto the main topic in the minds and mouths of those of us in the property business. The Business Guardian’s Editor has called this the property “bubble” and some of the main questions investors and owners are asking are — For how long can property prices keep rising this way? Are we about to experience a crash? For those outside the circle of property owners, the questions are more pained — With the other increases in the cost of living, will our wages ever allow us to save a deposit for a home? Will we ever be able to afford our own homes? Do we have to pay rent forever?

Let us say right away that it is impossible to answer any of those questions for certain in this column, but this week we will start to discuss some of the main features of this stage of the property market. One could well ask whether all good things must come to an end. But it is also interesting to consider whether these steep price increases are really a good thing..

These would need to include —

What is the market? — Many of the calls for an explanation of this extremely dynamic market seem to be based on a “western peninsula perspective,” but it has never been the intention of this column to focus so narrowly on such an important market. The property market and the price movements in it affect all of us in this small country. Either as homeowners and hopeful homeowners or as business people who have to pay rent and people who want to open businesses, we are all “in the same boat.” If the scarce resources of the construction industry are engaged in building large projects — such as those by UDeCOTT, NIPDEC, HCL and our other property developers — there will be increased costs to those undertaking other projects, such as the building of their own homes. These would include the emergence of less competent contractors, the present increases in material costs and the logjam in the approval process. The same principle applies to the scarce resource of land.

Central Bank Monetary Policy Report — The Governor of the Central Bank recently briefed us on the implications of the present high levels of liquidity and depressed interest rates in the shape of property emerging as a preferred investment. The Governor went on to say that the consequent property price increases are limited to a few areas only. Our own view is different, as there seems to be widespread inflation in property prices.

National Increases — As a matter of fact, we do not have the facts available, in terms of either quantity or quality, to really construct any kind of index for house prices. Our own attempts in that direction are private but it would seem that property prices have risen by over 30 per cent in the last two years or so.

Limited areas with no growth — In making that kind of estimate one also has to note that only a few limited areas, perhaps six or so, have experienced no price increases in the last two years.

Vendor/Purchaser behaviour — In this inflationary climate, both sides in transactions are exhibiting behaviour, which is not justifiable by the usual yardstick. Purchasers are paying more than a property is worth, in the belief that today’s overpayment can be eclipsed by tomorrow’s price increase. Vendors are dominant in this sellers’ market so they can “call their price” and wait for the right purchaser. Both sides are making long-term financial decisions on the basis of future price increases. So far events have justified this pattern of investment.

Supply-side implications — The people who actually produce the properties are themselves having their behaviour changed by the new environment in terms of the appraisal they make before investing in a project. The project appraisal process would ordinarily involve analysing a proposal in both pessimistic and optimistic modes — to establish the best and worst case scenarios. The behaviour of purchasers and vendors outlined above can result in developers embracing the optimistic scenarios as a matter of routine. So far so good, but when we consider the cost increases in the construction sector and other factors, the risk of mistakes is high.

Next week, we will examine some of the changes, which will affect the property market in the medium-term, foreseeable future.

Afra Raymond - Property Matters

Development of performance standards

Let me take some space in this week’s column to address the concerns of Nicolas Dean’s letter in last week’s Business Guardian. He disagreed with my March 25 column by raising points about the placement of the burden of property taxation and the accountability for the spending of our tax dollars. In a subsequent column — last week’s, on April 15 — I raised that very point and called for the development of performance standards to guard against that wastage of tax dollars.

Mr Dean also asked what would happen to property taxes during recession if they were raised in a boom as I had advocated in a previous column on Land & Building taxes. As I outlined in that column, the missing ingredient here is regular property revaluations — there has been no national reassessment since 1978. If these were carried out every three years — as is the case in Barbados — the level of taxation would be periodically adjusted to reflect changes in market value - both upwards and downward.