Published Thursday 8th January, 2004

REAL ESTATE is the term used to refer to property - for example, houses, land, commercial buildings and apartments - and it is one of the principal investments undertaken by most families, even when we include the high-net-worth people who are no doubt reading this!

This is the start of a new series to discuss the real estate market in Trinidad & Tobago and I will start by looking at residential property.

Although, as mentioned above, property is an important investment, it is really far more than that since the adequacy of a nation's housing - in terms of both quantity and quality - are vital indicators as to the standard of living of its people. The overall quality of life is dependent in large part on the physical circumstances in which that life is lived. For those of us aspiring to First World status, 2020 Vision and the like, it is essential to develop a fuller understanding of just what are the ingredients of the Good Life to which the nation is aspiring.

Despite the high level of national income and development, it is always amazing to reflect on the high numbers of our fellow citizens who are housed in the informal sector, which is also commonly called squatting - some reliable estimates put the numbers as high as 25% of our population. There is some way to go before we can say that our country is properly providing for its citizens in this important area, but that will be the subject of another column in this series.

The Nature of Demand

The value of a property flows from the level of effective demand it attracts; effective demand comes from prospective purchasers who are ready, willing and able to buy that property. Arguably, there is demand for any comfortable and well-constructed property; in establishing its value, however, we have to be aware of the level of effective demand for that property. There are several types of demand with most houses being acquired by families who are going to use these as their homes while in some cases people purchase as investments and yet others try to combine these objectives.

In our society there is strong demand for homes in communities offering access to the full range of facilities - transport, education, religious worship, recreation, shopping and other ancillaries like medical care. Those neighbourhoods offering that level of services are understandably in high demand with fairly constant price increases.

We can also consider the subtle but critical factors that attract effective demand from various sectors of the population, for example, the ever-important matter of 'who are our neighbours?'. This is an example of what can drive prices upward in particular areas. In this 'class-conscious' society of ours, those who can afford to will pay a premium to live in a community with good name recognition, like Lange Park, Westmoorings or Sumadh Gardens. In addition there is the attraction of having famous neighbours and the opposite case in which the introduction of a bad neighbour with a noisy or smelly business can reduce the appeal of a particular area. We can all remember the neighbour whose passion for fixing cars or raising dogs was a source of discomfort, if not the very decision to move.

This explains the old saying that the three most important factors in the valuation of any property are 'Location, Location and Location'!

Demand and Value

In view of the limited supply of land in the country - about three-quarters of our land is forest, swamp or reserved for agricultural use - the rising levels of national income and the growing population, it is not surprising that the prices of residential land and houses continue to rise. Many people believe that those factors make property an absolutely unbeatable investment since there is no more land being made, but the real nature of prices needs to be understood if we are to begin interpreting the market.

The housing market, like all others, is subject to the rules of supply and demand with an oversupply having the effect of reducing prices or slowing the rate of price increase. There were significant falls in value here in the last recession - 1984 to 1994 when the falls in oil prices, consequent increases in business failures, unemployment and mortgage defaults produced a great oversupply of property. In fact, it took several years for values to recover to their pre-recession levels.

The point here is that prices do not move in one direction without adjusting to reflect the underlying conditions. We will consider the issue of social stability and the possible effect on property values in a future column. How realistic is it to expect property prices to rise forever?