Real Estate - Property Matters by Afra Raymond
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How long will the property bubble last?

Published Thursday 29th April, 2004


Squatter settlement at Union Hall, San Fernando demolished by police last week.
Photo: Sookdeo Baney

This week we examine some of the factors expected to affect the property market in the medium-term, foreseeable future.

The present market conditions cannot continue forever and the burning question is: when will they change?

When the inevitable change comes, will there be sudden or gradual reduction in demand?

Will prices tumble like in the last recession or will there be a gentle touchdown? Are there signs which can help us to answer these questions?

We must consider the general economic outlook to get a sense of the market. Two critical points are:

Property financing — The vast majority of purchasers acquire their properties via mortgage financing. If most purchases are financed via mortgage, how can we expect property prices to keep rising at a rate far in excess of the rate of wage increases?

Linkages — As we said last week, our limited size means that all the parts of the market are linked.

The market is currently being fuelled by a mix of high liquidity, low interest rates, some limited economic expansion and a degree of social stability supporting a belief in the prosperous future of our country.

What would happen if one or more of these factors changed? How likely is such a change?

Some of the upcoming events in the next three to five years which would affect the general economic outlook are:

FTAA

We have all heard of the supposed date for implementation of FTAA here — January 1, 2005.

Of course, we also know that T&T is trying to get the FTAA headquartered in Port-of-Spain.

There is very limited understanding of what those developments will mean for our business community.

There is more discussion now and some speculation as to the impact on our present prosperity.

Most pointed of all was Vashti Guyadeen’s article on behalf of the IOB — in the April 8 Business Guardian.

Under her evocative title “Down to crunch time,” she outlined IOB research that a majority of our business leaders believe that FTAA will be implemented on time and that they are not ready to manage that change.

Most importantly, almost 75 per cent of those interviewed felt that FTAA would negatively impact the manufacturing sector.

The last time our manufacturing sector was “negatively impacted” the ripples were widely felt.

Energy revenues

On the other side of the balance sheet, we are all constantly reminded of the vast flow of revenues to come from the monetisation of our gas reserves — Trains IV to VII and so on.

The best estimates are that these revenues will peak in 2008. This is about four years from now but most of the new office and commercial schemes are emerging with payback periods well in excess of this.

Given our established pattern of public spending with almost all spending being of a recurrent nature and limited capital formation — recently remarked upon by Arthur Lok Jack — how much manoeuvering room does the government have when our major source of revenue tapers off?

Dr Dan Mahabir’s recent comment on the lack of fiscal flexibility and the perils of inflexibility is something I will return to in this column.

Govt housing programme

We also have an ambitious low cost housing programme which seems to be achieving some early success.

What will be the impact of the promised increase in the national housing supply? I believe that if the programme meets its targets we would see a slowdown in the rate at which house prices have been increasing.

Social stability

The only way we will continue to benefit from the general level of prosperity is if there is some social stability.

The expected increases in national income mentioned above will be no use if a large number of our citizens do not share in that wealth.

The last time I looked it up over 25 per cent of our people lived under the poverty line. Does it matter? If not, why not? Do we have plans to address this?

We have an opportunity now, in terms of those rising national incomes, to take the necessary steps. I have mentioned before that good housing is an ingredient in quality living; does our national housing programme provide for those most in need? If not, why not?

Last week we had painful scenes of squatters’ homes being demolished; does anyone really believe that that issue will just go away?

Balance and inflexibility

The housing market at this time is made up of a large number of new entrants who have recently bought property for development and sale or rental.

These new players have a higher level of borrowings and limited equity in their projects, with consequent inflexibility in terms of the scope for absorbing price reductions. Generally speaking, longer-term players need to borrow less since they acquired their properties when prices were lower. These players can more easily adjust their prices or rents to accommodate any reduction in market value.

Last week, we made some observations about the way in which the conventional development appraisal process had become coloured by the market; everyone seems to be taking an optimistic view.

It is almost a given to expect that prices will keep rising this way and even a slowdown in price increases would have an impact on the property. Coupled with the current increases in construction costs, this market would appear to have a limited capacity to adjust prices.

Caroni lands

We have all heard of the fact that Caroni’s surplus lands are to become available at some point in the near future. These are vast tracts of land and there is no clear picture to the public as to when, how much of and where these lands will be released.

If the supply of land which has potential to be developed is increased, it is also reasonable to expect a reduction in the rate of property price increases.

Next week we will start an examination of the Caroni lands and their possible impact on the real estate market.

Afra Raymond - Property Matters

Property financing —

The vast majority of purchasers acquire their properties via mortgage financing. If most purchases are financed via mortgage, how can we expect property prices to keep rising at a rate far in excess of the rate of wage increases?