The Myth of Large Apartments versus Small Apartments

The Myth of Large Apartments versus Small Apartments:

After a long period of denial that prices have dropped for any apartments, most people have now recognized that there has been a significant drop in prices. However, many of those same people who had been claiming that "prices in Lebanon do not drop" or "prices haven't dropped - there is just no buying and selling" and other such nonsense, have now changed their tune slightly. They're now claiming that large apartments have dropped in price, but small apartments have not. The purpose of today's post is to analyze this silly claim.

Let's call a large apartment 200 sqm or more, and a small apartment, anything smaller than 200 sqm, and for the purposes of this illustration, let's use 150 sqm. You don't have to use 200 & 150; the logic is the same for any pair of numbers that you choose. Let's say that prices in this building are $2,000 / sqm and both apartments are on the same floor. The price of the 200 sqm apartment is $400,000 and the price of the 150 sqm is $300,000 (price proportional to its size). Let's say that the 200 sqm apartment has now dropped by 25% (the number used by Mr. Makarem in an article we posted before) and let's say that the 150 sqm apartment has stubbornly remained the same. So, now the 200 sqm apartment is selling at 25% less which would be $300,000, while the owner of the 150 sqm is still stubbornly demanding $300,000. You're a potential buyer whose budget is $300,000, allowing you to (originally) buy the 150 sqm, but not the 200 sqm, but today both the 200 & 150 sqm are selling at $300,000. Which one do you now buy? Obviously, the 200 sqm, and the demand for the 150 sqm disappears while people at the 150sqm level clean out the 200 sqm inventory. As you can see, there is no way mathematically for a 200 sqm apartment to drop without the category below it dropping as well.

Of course, there are distortions in the market caused by Iskan and BDL's misguided policy to allow subprime loans for small apartments (with no money down). The seller here, by "helping" the buyer through signing a fraudulent letter (stating that he paid down 25%), will now exploit the naive buyer and make him overpay (using Iskan money). There are also distortions in the market because, normally, buyers of the larger apartments are sophisticated and informed and will not allow the seller to scam them into overpaying (anymore). Therefore, there's no question that buyers of the smaller apartments are paying way more than they should. This does not mean prices at lower levels didn't drop - it just means they're being conned into overpaying. If you're a cash buyer and an informed, sophisticated buyer of a small apartment, you will get a 30% discount - no question about it. If you're an uninformed, naive buyer using Iskan 100% loan (with no money down), you will overpay. That's life.


ٍSource: Real Estate in Lebanon