Published Thursday 4th December, 2008

As previously published, Nidco’s recent high-impact advertisements have been informing the public that the rapid rail project and the coastal water taxi are taking place “As part of a holistic plan to ease traffic congestion and create a more modern, efficient transportation network.” We stated our questions and asked for a response or copy of that plan. Neither Nidco nor the Minister of Works and Transport have responded.

On November 30, we filed applications under the Freedom of Information Act to both Nidco and the Ministry of Works and Transport. We are requesting the holistic plan as well as the contract for the rapid rail.

We will use all the proper means at our disposal to obtain these important documents, as is our right. We will also keep our readers informed as to the progress of those applications.

This week, we move to the question on the minds of many of our readers; are property prices falling?

There is no doubt that in most of the parts of the property market, prices are falling. We are referring both to prices actually obtained in sales and rentals, as well as asking prices. Asking prices are taking longer to come down, since vendors, as a group, are choosing to believe that they can still catch a purchaser if they hold on.

Two preliminary points here: firstly, we do not hold the view that a lowering of prices is the same as a “bad” or a “poor” market (more on that later) and secondly, we will ignore the activities of those at the very upper and lower ends of the price range. We are concerned with the properties with which most people would be involved.

To understand the shape and consequence of this lowering level of demand, we need to examine the various elements of the market:

·        Supply: The supply of both commercial space and new homes is now outstripping the level of demand and that can be seen by stalling or falling rental rates and sale prices in wide parts of the country. In both Port-of-Spain and San Fernando, the State has constructed a vast quantity of high-quality offices and that increased supply has already started to exert a downward pressure on rental levels.

Even with the Prime Minister’s announcement on November 30 that the Government would be suspending its development programme, the Housing Development Corporation is known to have a large inventory of completed houses to be released to purchasers at reduced mortgage rates. It is difficult to be sure, given the poor quality of information, but the delay in releasing these might be awaiting the completion of the new housing allocation policy.

·        The household budget: In terms of the residential market, we need to consider that the two largest elements of the typical household budget are food and shelter. With food prices rising by an estimated 70 per cent in the last two years or so, there is now real strain on the budget of those families on fixed incomes. That drastic increase in food prices has left less money to spend on the other major item, housing. That has led to an inevitable and widespread reduction of real estate prices.

·        Interest rates: There has been a steady increase in interest rates over the last three years or so as part of the Central Bank’s anti-inflation strategy. In relation to our contention that housing is one of the two largest elements of the typical household budget, the impact of these measures has been to significantly increase mortgage payments. A deeper discussion of the effectiveness of these anti-inflationary policies in wider terms is beyond the scope of this column.

Apart from the typical household we have been discussing so far, these increases in interest rates have also increased costs for property-owners in other situations. That would include those who have used the equity in their property to obtain finance at a reasonable cost.

The property developers have also felt the impact of these interest rate increases sharply since they rely heavily on finance to carry out their operations (more on this below).

·        The bankers: Most property transactions are financed by banks and it is therefore important to consider their position in all this. Apart from passing on to their borrowers the interest rate increases discussed above, banks have also taken other steps to guard against the risk of the market declining. These have included bigger discounts on amounts advanced on valuation figures and less monies advanced on projects.

·        The developers: Property developers have felt the impact of both the interest-rate increase and the more cautious terms being advanced by bankers.

The property development industry has learned significant lessons in the management of financial risk from the last boom and crash, for example, the importance of getting purchasers to finance the cost of development via staged payments and the benefits of pre-leasing their commercial projects.

Some of the very large developers have even financed their projects via overseas lenders at significantly lower interest rates. Notwithstanding that most of our property developers learnt these lessons, the significant reduction in effective demand and the more expensive financing terms of local lenders has led to the shelving of several major developments.

·        The agents: The real estate agents have been hit hard by the downturn in prices and market activity. It will be difficult to get any sympathy from a public long grown fed-up of continually rising property prices.

Remember that that public also habitually blamed those prices on the real estate agents, so little sympathy is to be had. It needs to be said that the agents have not done themselves any favours with their unrealistic public statements on the strength and health of the property market.

More than one firm of real estate agents have now closed down due to the lack of sales and we have all known of the slowdown for the last year at least, although I have been speaking in those terms for at least 18 months now. We need to take a sober moment to reflect on the meaning of responsibility. It is easy sport to blame whoever is in government for the problems which beset us.

One of the key players being mentioned in the blame game now unfolding in the US and the UK is the rating agencies. These are the financial analysis companies which attach risk ratings to companies and financial instruments. They are now being accused of contributing to the scale of the disaster by inaccurate and misleading reporting on fundamentally risky investment products.

When we consider our own real estate market, there is cause for pause since it is not possible to mislead the players, professionals or bankers by ambiguous statements. After all, we all knew that the market had slowed down and that was the main topic of discussion whenever we spoke.

So who is left?

Who can one have possibly been trying to mislead?

The only person left is the novice: the first-time home owner or investor. Our spokespeople need to be more responsible and conscientious in their public statements, if we are to move to a higher level of civilisation.

Ultimately, the market sentiment has shifted and prospective purchasers are waiting to see how far prices will decline before proceeding to purchase.

Afra Raymond is a chartered surveyor and a director of Raymond & Pierre Ltd. Feedback can be sent to afra@raymondandpierre.com.