|How long will the property bubble
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
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:
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
The last time our manufacturing sector
was “negatively impacted” the ripples were widely felt.
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.
The only way we will continue to benefit
from the general level of prosperity is if there is some social
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
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
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.
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
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.