Friday, August 21, 2009

Lebanese Real Estate: A Bubble About To Burst?



What goes up must come down especially if the rate of increase has resulted in lifting real estate prices into an orbit in outer space that is beyond the reach of most mortals. This was the case when home prices in the United States were lifted into the stratosphere and the affordability index plummeted to a historical low. The results were anything but pretty. The same bubble phenomenon was observed in the 1980’s in Japan with equally devastating outcomes that resulted in what became known as the lost decade. Currently the US experience is being shared by the United Kingdom, Spain, Australia and Dubai whose real estate prices have fallen by an eye popping 60 % in many cases.
Since real estate prices in Lebanon in general and in Beirut in particular are still on a steep upward trajectory it behooves us to ask whether this bubble is any different than any of the others that have already burst. Most of the Lebanese that I have posed this question to are convinced that the Lebanese case is different and that this is not a bubble , but then people who are in the midst of a bubble rarely recognize it, just ask Mr. Greenspan the ex Chairman of the Board of the US Federal Reserve.
Unfortunately statistical data on real estate in Lebanon is not readily available but then the anecdotal evidence is all over the place. Some sections of Beirut are full of new luxury high rises or renovated ones. Most of these units fetch on the average over $2000 per square meter. This means that an average apartment of say 250 square meters demands at least half a million dollars. Many of the newer luxury units are going for $6000-7000 per square meter and the newest residential tower is asking for $14000 per square meter for the ground floor units. This means that an apartment in Beirut will cost $3-5 million. That is a princely sum for any city anywhere in the world but it obviously is problematic in a city where an annual income of $30,000-40,000 is considered to be on the high end. Many workers do not make more $10,000 per annum.
There is some truth to the argument that such buildings are not meant for the ordinary Lebanese but are being built for the lucky few at the top of the economic ladder, for the expatriates who have come back to retire among friends and relatives and to wealthy individuals from the Gulf states. This might be true but unfortunately it is also true that as prices in one sector increase then prices in all other real estate sectors follow suit. Apartments in most of the popular resorts close to Beirut are already selling for over $1000 per square meter.
What might prevent the bubble from being calamitous is the lack of leverage and speculation. Flipping apartments is not common neither are thirty year mortgages, at least not yet. There are signs that some individuals are already speculating on a continuous upward trend in real estate prices by purchasing homes in the new residential developments with the intention of renting them for a while and then selling at a huge profit. We have heard that reasoning before in Florida, Las Vegas and San Diego among many other cities all over the world haven’t we?
Another worrisome trend is that of individuals who are cash poor but feel wealthy because they feel that their homes are worth so much that they can afford to splurge on cars, trips and other luxuries by borrowing money at usurious rates. This phenomenon is so similar to the home equity loans that enabled Americans to use their homes as ATM machines except that it is potentially more devastating.
Even if miraculously, Lebanon manages to avoid the dire consequences associated with the bursting of a real estate bubble it will not escape the widening of the chasm between the few haves and the rest of the have not. Lebanon appears to be living the biblical admonition that says “For he that has, to him shall be given: and he that has not, from him shall be taken even that which he has”.

A Podcast of the above can be heard at: ramblings11.mypodcast.com

37 comments:

Anonymous said...

Lebanon will not escape the ruinous effects of a real estate bubble. Just look at what has happened to Dubai.

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