I ended last week’s column by suggesting that the commercial banks – which account for 58% of the mortgage lending by financial institutions – have both the liquidity and the reserves to withstand any significant reduction in house prices and consequential foreclosures. I believe that the position is different with the non-bank mortgage lenders which would include the insurance companies and more significantly the New Building Society which by definition is heavily invested in the housing sector.
The NBS accounts for 31% of the assets of the non-bank financial institutions and has some 51% of its own assets in mortgage loans, by far the most exposed institution in the sub-sector. Part one of this column two weeks ago noted that the commercial banks have been gaining market share in the mortgage market mainly at the expense of the NBS.
Over the five year period 2006 to 2010 NBS increased its mortgage loans from 6,299 to 8,197, an increase of 30% over the period, or an average of 380 new mortgages per annum. It is at least surprising that the NBS which offers very competitive lending rates could only increase its annual number of mortgage loans by less than 10% of the number of houselots allocated by the government. This probably points to a situation of allottees not being able to build for several years, if at all.
In part two last week, I noted that the PPP/C 2006 elections manifesto had stated a figure of some 70,000 house lots having been allocated across the country since 1992. The annual budget speeches since then have revealed that since 2007 the government has spent over twenty billion dollars on development of these communities. One would therefore have expected the country’s sole housing and loan institution to have done much better during the house lots boom. Whether NBS’s failure to cash in on the boom is a weakness or serendipitous is debatable, but it would still be the most exposed entity in case of a bubble in the housing market.
NBS and speculators
The average balance on the mortgage loans outstanding by the NBS has increased from $2.28 million at December 31, 2006 to $2.64 million at December 31, 2010, though about 50 % of the number of its loans is for less than $2 million. Unless there is a serious loss of income by borrowers there should be no major difficulties in servicing those debts, even if there is a fall in house prices. But that would not be the whole story.
The NBS has seen its lending limits increased significantly over the past few years and if the notes to the 2010 audited financial statements are correct, it has been engaging in some adventurous lending which could have serious consequences involving $313 million.
Except for this, NBS is protected because the overwhelming majority of its homes are owner-occupied. In such circumstances, regardless of the state of the housing market there should be no problem once homeowners can service their debts whether from their own resources or from remittances. NBS’s conservative lending policy will also work in its favour since the policy is structured to ensure that the institution does not lose, even in a forced sale.
That then leaves us with the property developers who build with a view to sell down the road. This is the group normally most at risk since they build now with a view to sell later. In a deteriorating market this is bad for the developer. Experience has shown however that in many instances this is a group and an activity that is characterised by money-laundering and they do not mind waiting a few years to dry-clean their money.
In summary, therefore, there are many reasons why at this stage lenders need not be overly concerned about a housing bubble. The banks are not disproportionately exposed and have sufficient reserves and liquidity to cushion any problems in the housing market. Of the non-bank financial institutions the one with the biggest exposure is the NBS but it too ought to be able to withstand any decline in the market.
And many of the property developers have characteristics of their own that allow them to act in their own special way – outside of the normal rules of economics and even the law.
One million per house lot
This does not mean that a housing glut will be problem-free. It could bring an important sector of the economy to a halt and cause ripple effects on the construction industry, the wood sector and distributive trade, lending and government revenues.
For lenders, if demand for homes dries up lending will also decline and the institutions may be even more reluctant to take in deposits. Even a modest decline can have wide ripple effects.
But there are other issues we need to consider in the housing policy. Whatever its faults, the PNC did have some excellent housing projects and decades after their establishment, Meadow Brook Gardens and South Ruimveldt are pleasant communities with decent amenities.
By contrast the Stabroek News editorial of July 7, 2011 may have only just overstated the position when it said that under the current housing policy a large expanse of bush crisscrossed with mud dams earns the accolade housing scheme.
Yet the government reported that in 2009 it spent some $1.5 billion to develop six new sites to provide 1,504 new houselots – or one million per house lot in low-income settlement schemes. It just makes no sense other than to those spending and those benefiting from such expenditure.
And what do these areas have to show for such generous spending? Whether a community is low income or top range, it needs places for the children to play and adults to exercise and socialise, schools to teach and learn, post offices for the elderly, temples mosques and churches for worshippers and good roads, electricity, water and sewerage for all.
They need roads in and out, wide enough for traffic not today but twenty years hence. The residents need jobs conveniently located or accessible to where they live. One of the ironies that are being confronted by the ever expanding number of commercial banks is that the person living in Diamond still finds it more convenient to do their banking in Georgetown than at the Diamond branch for the simple reason that s/he works in Georgetown.
In many areas where house lots have been sold basic sanitation facilities would be considered luxuries. The Guyana Population Census 2002 reported over one half of the country’s households still use pit latrines and that the proportion of households using the modern method of water closet linked to sewer line has declined! Surely after sixty years we should have extended the sewer system beyond Georgetown.
The other major problem associated with the housing policy is corruption, wastage and extravagance. Budget speeches show that over twenty billion dollars have been expended on housing schemes since 2007. Not surprisingly, the house lot policy does not seem unrelated to electioneering. For example in 2006, the year of the last general elections, $795 million was spent on developing infrastructure for 9,000 houselots “in areas such as Zeelugt North and Sophia.” The budget speech announced us that “similar work was undertaken on 4,700 houselots under the Low Income Housing Project in areas such as Westminster, Belle West, Plantation Glasgow, Cummings Lodge and Sophia.” No value was given. And then the same paragraph states that “nearly $251 million was spent on providing house lots in areas such as Vigilance South, Amelia’s Ward, Vryheid’s Lust and Block II Enterprise.”
In 2010, one year before the next general election, the nation was told that 6,331 house lots were allocated and some $9P.6 billion dollars was spent (average $1.5 million), against an original budget figure of $2.8 billion. What is interesting is that many of the communities benefiting from the 2006 spending such as Belle West, Westminster and Sophia are again part of the loot. As if that is not enough, some $3.6 billion has been allocated to the housing sector in 2011 and some 7,500 houselots are earmarked for allocation.
If there is a problem on the expenditure side, the income side is no different. I am reliably informed by one of the recent on-the-spot purchasers of a house lot that receipts for the sale of land are issued by the Central Housing and Planning Authority (CHPA), a statutory body.
Appendix T of the National Estimates for 2011 showing an abstract of revenue and expenditure of this body indicates that almost the entire income of the CHPA for 2010 comes from the central government – $150 million as a subsidy and $7.5 billion as a capital grant. If indeed 6,331 house lots were allocated in 2010 then even if the average sale price is $300,000 (some lots are sold for more than $1.2 million) the revenue should be over $1.8 billion. Something is missing.
Over the course of the last three weeks I have had my closest look at what constitutes the country’s housing policy. Prior to 2006 the house lots given out by the government should have far exceeded the unmet needs of the entire population with many to spare.
Further allocations since then would have exacerbated the situation.
It is therefore necessary for a survey to be done to ascertain the number of house lots across the regions that have still not developed into houses.
It would be useful too for a value-for-money audit – or better still a forensic audit – of the housing programme and expenditure to be carried out. Housing is a major public policy/social/basic needs issue with important long-term implications. It requires coordination with and can contribute significantly to several other sectors. It should not be left entirely to an overenthusiastic individual who cannot remember a payment of $4 billion.
While the lending institutions do not face any immediate risks of and from a bubble, an extra bit of caution in their lending programme could be very useful.
For those seeking a home, the advice might soon be to buy rather than build.
As the supply of homes increases relative to demand, cost may very well exceed market price. Buyers welcome that.
I apologise for two errors in last week’s column which are regretted but which did not affect the thrust of the article.
The last sentence under ‘Self-Help’ should have read: And as we have said this does not take in the number of private houses built by individuals on privately acquired lands.
The second was in respect of the dimensions of the lots being offered by private developers.
In the first sentence of the second paragraph under the heading ‘Friendly domestic capitalists’ these were stated as 50 yards by 100 yards instead of feet in both cases.