Housing Market in the Times of Financial Instability
Jamal Abi Faraj (Al Aanbaa)
29 يونيو 2018
This article intends to give an insight about the housing prices and the reason behind their declines which is expected to trigger a next big thing.
As it was noticed recently, housing prices have been declining in an accelerated manner for the last couple of months. In fact, this decline could be directly attributed to the cut off on backed up interest rates on housing loans that was imposed by the Central Bank of Lebanon. This has led to an increase in supply at a higher rate than the increase in the demand.
On the other hand, some real estate companies failed to meet their commitments which has led their way either to going bankrupt in some cases or to being in risky situations. As a result, the economy started facing a negative cycle whereby potential investors shifted from the real estate sector and current investors were affected by that leading them to liquidate their held investments. By doing so, the supply in the housing market increased. What validates this theory are the ads that are being posted either on television or social media aiming to increase the desire of people to invest in the real estate by highlighting the price increase that was accomplished in this sector from 20 years up until now. These companies are now working as advising firms for investment purposes! The only thing that we can take for granted is that the real estate companies are not saints to offer free investing ideas given that all they are doing is trying to ditch what can be ditched from their portfolio to liquidate their investments at prices higher than what can be done at a later stage.
Up until now we haven’t mentioned the consequences, if the default on housing loans happened in bulks like what happened in crisis of 2007, it will have a major effect on prices. Why are we putting this scenario? With the rotten economic conditions that we are living in such as, high unemployment rates, political corruption, moral corruption, administrative corruption, companies defaulting and high interest rates leading to curb new investments that create job opportunities, it is assertive with no doubts that higher unemployment rates will be induced which will eventually lead to people defaulting on their housing bills. The banking system is significantly exposed to the real estate sector according to a study done by the IMF and the World Bank, where more than 90% of all loans to the private sector is exposed either directly (through housing loans to end users, loans to developers, contractors, and to other real estate professionals) or indirectly (through all the other loans to corporates mostly collateralized by real estate). It is worth clarifying here that in case of default a bank must offer the collateral for sale which is in our case the house, again leading to an increase of supply in the housing market, these houses will be offered at a discounted value (lower price) than the market price for banks to liquidate them in the shortest period to limit their losses. Banks will be able to manage their liquidity until the acquired price of the house becomes below the remaining principal of the housing loan amount, with a huge share of housing loans in their portfolio the loss that is hitting the banking sector from real estate will decrease the ability of banks to preserve its financial soundness. This leads to a potential failure in the banking sector in case the lender of the last resort didn’t interfere (Central Bank). Here comes the next big question. To what extent is the ability of the central bank to back up troubled banks? Especially after the recent hit that cost the central bank some of its foreign currency reserves to curb the decline of Lebanese Pound (LBP) after the political crisis loomed in the last quarter of 2017.
Few readers tend to perceive the issue controversial especially when it comes to the confusion induced when they hear about foreign investors approaching our country to invest considerable amounts in different sectors. But, if these investors are following Warren Buffet’s mentality, ”best times to make huge amounts of money are in the middle of financial crisis, by knowing when to buy and when to sell”, the only question to be asked. Are we in the middle of a financial crisis that we haven’t yet felt its burning heat?