?Will The Real Estate Bubble In Lebanon Burst

To answer this question, we need to understand first the previous and current situation of the real estate sector in Lebanon.

Previous Real Estate Situation:

Since 2005, property prices have risen exponentially affecting almost all of the Lebanese real estate sector, and by 2011, the average increase was more than five fold (500%), while the GDP has risen only around 52%[1] during that same period. House prices in the upper market segment have increased considerably that almost all Lebanese are priced out of the market. They’ve reached levels higher than most luxurious cities in countries enjoying political stability and a much higher GDP per Capita.

Current Real Estate Situation

When it comes to the real estate sector’s current situation in Lebanon, one can notice that this topic is in general untreated by the media and hidden by the political elite from the public. There is a lack of transparency and a blackout on the subject, and the concerned do not want to admit that the real estate sector has entered the “Intensive Care Unit” as it directly impacts their own interests. These are banks in Lebanon and real estate giants, predominantly owned by politicians and their subordinates.

Although this has worked a few years back, today anyone can see that this sector is in crisis mode. The first obvious sign of the crisis emerged to the public when the Central Bank decided to cut interest rates[2], which is expected to decrease even further. This step was taken due to the slow performance of the real estate sector during the previous years, and not as an act of sympathy to support the young generation and help the youth have a home.

Many strategies are implemented to maintain the real estate sector and prevent its collapse. Listed below are the most commonly used plans:

·         Decrease in interest rates;  

·         Housing loan offers;

·     Circulating rumors of upcoming inevitable hikes in prices (hurry up and buy before the Prime Minister comes back to Lebanon / taxes are implemented / Syrian war is over / president is elected / electoral law is approved, etc.);

·         Stating that Lebanon is small and the land is scarce;

·         Proclaiming that real estate is always a profitable investment;

·         Increasing advertising campaigns, publicity, and offers;

·         Practicing opacity in real-estate transactions;

·         Using deceptive selling techniques;

Looking at these strategies today, we can confirm that advertising proved worthless and rumors are just rumors. The story about scarce land is no more than a misleading claim as cities much smaller than Beirut are more densely populated.

From their ends, the banks are tricking the general population with different loan offers that are actually all the same with just a different formula (higher down payment/smaller interest rate OR lower down payment/higher interest rate). Additionally, deceptive selling techniques are used such as developers marketing a 120 sq.m. space while being actually closer to 100 sq.m. As for profitable investment, it has become a generally accepted reality that developers who invested in real estate after 2010 did not reap expected benefits. And finally cutting interest rates, which is the last resort, had a very minor impact at first as predicted, but later proved to be a general disappointment and a big setback.[3]

Unfortunately, the above plans are not based on strong arguments and after many years, have proven to be inefficient and unreal as the real estate sector continued its poor performance and decline since 2012. Why is that? Because none of these plans targeted the root cause of the main issue which is the purchasing power of buyers.

The real estate developers and banks are now out of options. The actual reason for selling shortages is, in fact, the general population lacking cash reserves. Whatever strategies implemented to seduce the population into buying real estate will be faced by a fact of calculus: the purchasing power doesn’t allow the purchase. Developers and banks as well failed to reduce their profit margins to prevent a bubble burst. Today, the more developers resist price correction, the higher the risk of collapse, and the higher the probability they will be selling less than the cost.

What Lebanon is witnessing is called in economics a “Housing Bubble”. What is it exactly?

It is a run-up in housing prices fueled by demand, speculation, and exuberance. Housing bubbles usually start with an increase in demand (2006), in the face of limited supply which takes a relatively long period of time to replenish and increase (2010). Speculators enter the market, further driving demand. At some point, demand decreases or stagnates while at the same time supply increases (2012 till present), resulting in a sharp drop in prices — and the bubble bursts.

As the definition indicates, this bubble is expected to burst, not only due to the main rule of Supply and Demand but also due to the following factors:

-          Increased unemployment; (youth unemployment exceeding 35 percent)[4]

-          Very low GDP per Capita; (≈7,000 $)[5]

-          Politics and security instability;

-          Decrease in the transfer of money from expatriates;

-          Low oil prices/cheap labor/low building material cost;

-          Real estate speculators/amateurs*;

-          Lack of urban planning;

-          Lack of financial and economic planning;

-          High debt to GDP ratio (146%)[6]

*A real estate amateur is an investor new to the real estate business, who decides to invest in the real estate sector due to its high profitability during the good years. A real estate amateur lacks the experience in this sector which is leading to, bad quality of products in the market and a stubborn attitude. Due to the lack of understanding that the real estate sector is just like any other sector, it has ups and downs, and during downs, one should sell quickly at a minimum loss).

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Source:  Real Estate in Lebanon

Author: Fan of Real Estate in Lebanon

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[1] https://www.google.com/publicdata/explore?ds=wb-wdi&met=ny_gdp_mktp_cd&idim=country:LBN&dl=en&hl=en&q=lebanon+GDP+chart

[2] http://www.banque-habitat.com.lb/news/banque-de-lhabitat-reducing-the-loan-interest-rate-from-5-to-3/

[3] https://newspaper.annahar.com/article/581052

[4] http://www.dailystar.com.lb/Business/Local/2014/Dec-24/282123-youth-and-unemployment-in-lebanon.ashx

[5] https://tradingeconomics.com/lebanon/gdp-per-capita

[6] https://tradingeconomics.com/lebanon/government-debt-to-gdp