Price of Real Estate is determined by supply and demand

Land cost has absolutely nothing to do with the price at which you're able to sell your apartment, anybody with any formal training in economics or finance, would know that. In fact, it's the other way around. Housing prices are what determine land prices. The higher you can sell your apartment, the higher land prices go because of more people like you entering the sector. Of course, the reverse is true. If house prices fall, land prices fall, especially after some late entrant morons (those who entered the business in the last 10 years) who think they understand real estate. 

Cost of construction has absolutely nothing to do with the price at which you can sell. Cost of construction determines if you'll make money or lose money after you've finished construction. Price is determined by supply and demand. In short, if there are too many apartments and not enough people with cash to buy, prices drop. End of story

Why a pair of jeans costs triple in Lebanon

Price Transparency, Monopolies, and why a pair of jeans costs triple in Lebanon.

What is the one key factor that allows property developers to keep shafting the Lebanese consumer (other than his willingness to allow it)? It is the lack of price transparency. There is no reliable data in the market about what the "real" prices are, therefore your only source of data is the seller's word. The other related factor is collusion in the market. So they will all scream with one voice that prices haven't dropped (you've seen their comments in the press and on our page). Even when one of them, like Raja Makarem, breaks the "Thin Blue Line of Silence and Lies", by telling the truth that prices have dropped and that they're in trouble, they'll accuse him of being a liar.

This collusion leads to an effective monopoly, which is not different from how the Lebanese consumer is getting shafted in every other area.

Here's an example. This pair of jeans sells for $300 at the Sole Distributor (Wakil 7asri). If there's only one distributor, then he can price it at whatever he wants. So this guy sells it at $300 in Lebanon, where the per capita income is $600 per month, so it costs 1/2 a month's salary. In the US, where the per capita income is $4,600, it goes for $99 online delivered to your house, so it costs 2% of your monthly income.

In summary, there are advantages to capitalist systems in that competition provides low pricing and a variety of good products to consumers. There are advantages to socialist, or controlled economies, in that people get benefits such as free education, free medical care, retirement, free housing, etc. In Lebanon, it seems we have the worst combination of both worlds - expensive products, high taxes, and with no services, benefits, or infrastructure ... and no protection from the wolves.

And this is where we come in. Our mission is to provide the Lebanese consumer with the transparency to make an informed decision ... in other words, to protect him or her from the wolves.


ٍSource: Real Estate in Lebanon

Large Apartments vs Small Apartments (Part II)

Large Apartments vs Small Apartments (Part II)

You've read our post a few days ago in which we shredded the silly claim that large apartments have dropped in price, but smaller ones haven't. Today's post will pretend that this myth is true and analyze what it means.

Let's assume that large, expensive apartments have dropped in price or nobody is buying them anymore, while smaller apartments are being purchased, especially with Iskan loans.

Who are the buyers of the large apartments and who are the buyers of the smaller ones? We don't mean to be condescending here, but, all else being equal, I think it's not unreasonable to assume that, statistically speaking, the buyers of large apartments are older, richer, smarter, and/or more educated and knowledgeable (i.e. privy to more public and non-public information) than the buyers of smaller apartments.

In other words, smart money has now pretty much totally exited the real estate market, leaving only naive or less smart money which is still being conned and preyed upon by unscrupulous sellers and convincing them into taking out large loans and purchasing this overpriced junk that they can't afford.

Caveat emptor!


ٍSource: Real Estate in Lebanon

The Myth of Resilient Land Prices

The Myth of Resilient Land Prices

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's 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. We've addressed this nonsensical claim in a previous post. There is another persistent myth about land prices. It goes something like this. Lebanon is a small country and there isn't much land, so while apartment and house prices can fall, land prices can never drop. The purpose of this post is to analyze that silly claim.

People who have studied real estate and who understand the science behind it, use a concept called "Best and Highest Use." So whenever you appraise a raw (i.e. With nothing built in it) piece of land, you appraise it by looking at the "best and highest use" for this piece of land. For example, let's say that you own a 3,000 sqm piece of raw land in the most expensive neighborhood in Solidere, Achrafieh, or Ras Beirut. Let's say you decide to build a huge statue for your grandfather Latif on this piece of land, with a nice garden around it, for your family to bring flowers and place at the grave of your grandfather Latif. If you make it a condition of purchase that this statue of Latif can never be knocked down (to make way for a high rise or mall or other commercial structure), then what is the value of this piece of land? This is rhetorical question. The value is pretty much around zero, albeit, your cousin Jamil might pay top dollar, because he was a fan of Gramps Latif. However, for most people, the value is zero.

So what is the best and highest value for this piece of land? The answer is a function of the regulations and zoning in this particular neighborhood, but the simple answer is related to how many floors and area of the building you can construct on this piece of land. Sometimes, this is referred to as "the price of air".

So let's say that you purchase a piece of land today. Knowing that the apartments in buildings that have been completed today cannot be sold and that there are hundreds more coming online every few months, it is pretty clear, that your building, which would be completed in 2-3 years, has zero prospect of being sold. Therefore, you would sit on this piece of land for the next 5-10 years, or worse, if you build, you'd have an empty building, haunted by ghosts, and degenerating every year, which will make you pay maintenance and other costs, without you seeing a penny for the next 5-10 or more years. Let's say you bought this piece of land for $10,000,000 cash. If you put the money in treasury bonds, at say 8.5% interest, your money in 10 years would be worth $23 million. On the other hand, if you had bought the land and sat on it for 10 years, you would just sit there incurring costs, with no return, especially if you build on it.

Therefore, mathematically, if there's no demand for finished apartments, then there's no demand for land and their prices would drop, along with everything else.

Finally, one thing amateurs don't take into account when they assess the size of Lebanon in making the silly conclusion that prices of land will always go up, are the loose zoning rules in this country, in which you can build 5-story buildings anywhere from Beirut to Anjar. What this means is that Lebanon is more like Singapore or Hong Kong (minus the infrastructure, 24 hour electricity, and rule of law). In other words, you can put 50 million people in it if you build all these junk buildings all over the country. By the way, if you have any doubt that land prices are dropping (and that there's no demand for them), just look at the bank ads offering to lend you money to purchase them. Why would banks, for the first time ever, offer loans on land, which is the riskiest real estate investment (for people who really understand real estate and not amateurs talking out of their BLEEP)?

ٍSource: Real Estate in Lebanon

Remember, if you believe it, it's not a lie

It is not enough that the developers and other owners of properties lie to the masses and fool them into buying.

It is not enough that Iskan, BDL, and banks provide easy facilities and subprime loans to make it easy for the masses to buy properties, while they suppress all transparency.

For the real estate scam to keep working, it is also necessary that buyers be a gullible bunch who believe such myths like somehow Lebanon is different from other economies, and that the average apartment in Beirut today being $588,000 is justified even while the per capita income is $7,000. They have to believe the nonsensical myths that prices in Lebanon do not drop. They have to believe this stuff for them to allow the seller to fool them into massively overpaying for this junk.

And this is where we come in. Our objective is to level the playing field and provide facts and information to save the Lebanese citizenry from exploitation by these unscrupulous sellers.

"Remember, if you believe it, it's not a lie."

George Costanza (from Seinfeld) on how to beat a Polygraph (lie detector).

"And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. Who controls the past controls the future ... who controls the present controls the past."

George Orwell, 1984


ٍSource: Real Estate in Lebanon

Real Estate's Titanic

Some of our readers from the real estate sector, as you can see from their 'loaded' comments, don't seem to understand how Capitalism works, and believe that they should make a guaranteed 30% annual return on their capital, year, after year, after year, ad infinitum.

Here's how Capitalism actually works:

You deploy capital in a project. This capital is at RISK, which means that sometimes you make money, sometimes you lose money, with the expected annual return being X%, let's call it 30%, for now*. However, too many amateurs are crowding the sector recently, and those have never been in a recession or real estate slump, like the one in the 1990's. Therefore, today, when they've entered the beginning of a real estate slump, they're shocked and don't know what to do, so instead of lowering prices and making less money, or losing a little bit of money, they'll just hold on to the Titanic and sink with it. They'll just keep waiting for the hoards of Gulf tourists to come back, or the plane loads of expats from the so-called 7 million Lebanese in Brazil, who are all just dying to move back here (as if the reasons they emigrated in 1890 changed today), or the ones in Africa, who can't even transfer their depreciated local currency out of the country, or the ones in the Gulf, whose bonuses were slashed by 2/3 (proportionally to the drop in oil).

By the way, when we say beginning of the recession, we mean it. In a couple of years, you'll look back to today, which is the worst day of your life, as the good times.

Here's our advice to you: Sell now at any price or YOU WILL GO BANKRUPT.

For any of you still fooled by those charlatans, and contemplating buying today, just fast forward a few years and think about all the empty unsold apartments today, and all the ones in the pictures we posted (which are maybe 0.01% of the new supply coming in), and look at the state of the economy, and the geopolitical security situation, and try to guess which way prices are heading.

Oh, and one more thing. For the guy still constructing, instead of cutting his losses and exiting. When you see your colleagues with completed projects not being able to sell hardly any units, and having to massively lower their prices, WHAT ON EARTH ARE YOU THINKING?

* On a side note, and to show you their ridiculous assumptions, if someone made 30% a year for 30 years, $100,000 would turn into $262 million. So all anyone has to do is to take the money his parents would have paid for his college education, plough it into real estate development for the next 30 years, and retire with $262 million at 58 years old

ٍSource: Real Estate in Lebanon

Multiple Personality Price Disorder and the Schizophrenia of the Real Estate Sector

Multiple Personality Price Disorder and the Schizophrenia of the Real Estate Sector:

Let's say that you bought an apartment for $180,000 (the agreed price between you and the seller). You don't have ANY of the money, so he tells you that he'll "help" you, by signing a (fraudulent, illegal) letter that falsely attests that you paid 20%, so you can get an Iskan loan for 100% of the price you paid. This is what is called a sub-prime loan, by the way, which lead to the 2006 crash in the USA. To get the 100% loan, which is $180,000, you need the appraiser to write a (fraudulent, illegal) appraisal report that your apartment is worth $225,000. Then you go to register the apartment with the government. To evade taxes, the buyer and seller both lie to the government and say the apartment was bought for, say $90,000. After some haggling back and forth, and perhaps greasing some palms, the apartment is "determined" by the government to have been sold at $100,000, thereby saving you around 44% on your taxes. Finally, there's the actual market price, which this is the price that the smartest, most informed buyer paid in the last few months. This price is highly classified and hidden by the developers through the lack of transparency and collusion in the system. Let's call this price $150,000. Finally, there's our price, which is the projected price for this apartment in 5 years. And here it is: $80,000.

Here's the summary of all the prices on this one apartment:

Purchase Price: $180,000
Actual (smart buyer) Market Price: $150,000
Appraised Value: $225,000
Government Registry Price: $100,000
Our Projected Price: $80,000

ٍSource: Real Estate in Lebanon