Latest update April 19th, 2024 12:59 AM
Jun 05, 2013 Editorial
The mighty USA has been laid low economically since 2008 by a host of chickens coming home to roost, but the feather that broke the camel’s back was the collapse in the housing bubble created in the preceding decade. Housing bubbles usually begin by normal demand from prospective buyers but soon the demand is pumped up by speculators who jump in, convinced that enabling factors such as low mortgage rates etc. will “persuade” buyers that the ever increasing prices are affordable – but will not long remain so.
In the US, the government’s seemingly progressive efforts to bring down mortgage rates to facilitate low-income buyers, long locked out from home ownership, ended up with banks abandoning their traditional conservative lending practices and issuing a trillion dollars of the so-called “NINJA” – no income, no jobs or assets – loans.
As conditions change, as they inevitably will through supply outstripping demand via change of demographics, for instance, or a change in credit policy resulting in higher interests as occurred in the US, the bubble soon bursts. In the US, there was much handwringing about the dire status of the banks that issued the mortgages and they were eventually rescued under the “too big to fail” doctrine. The cries of the millions thrown out of their homes through foreclosure of their loans went unnoticed.
In Guyana, the announcement by New Building Society (NBS) that they are lowering their mortgage rates once again can be seen as good news, but against the background of other moves by the government, we have to be concerned whether we are creating a housing bubble that will soon burst. Taxpayers will have to then bail out banks and other lending institutions while throwing thousands into the streets when the latter cannot afford to pay their mortgages.
The present administration unquestionably inherited a situation where there was a genuine shortage of housing after the failure of the previous government’s “feed, house and clothe the nation” plan. It has done a good job in giving out “house lots” on which applicants built their own houses, mostly through their own funds. In Guyana, banks did not traditionally lend to the poorer citizens and as a result they were accustomed to securing their own funds and sweat equity to build their homes.
But in the last five years, there have been a welter of initiatives by the government to bring mortgages down to the “small man”. Banks now do not pay corporate taxes on profits from mortgages made to this sector. Last year, GBTI alone earned $390 million from this facility. Secondly, insurance companies such as Hand-in-Hand were allowed to enter the mortgage business. From the borrowers’ end, the Government now allows them to deduct payments on mortgages from their income tax. Led by NBS, which was formed specifically to provide mortgages, interest rates on this product have been plunging steadily downwards. The government has explicitly facilitated the housing mania through their sponsorship of very highly publicized annual Housing Expos.
As a result of all these inducements and others, mortgages amounted to $33.8B in 2010, up from $27.3B in 2009 and we are sure that the figures for the later years have maintained their upward trajectory. NBS, the largest mortgage provider advanced $4.2 billion in 2011 and this skyrocketed by 60% to $6.75B in 2012. In making his announcement about lower interest rates, NBS’s CEO predicted that 2013 should see them surpassing their previous loans and profits.
Guyana has a population that has remained almost constant since the 1970s through high migration levels. If the government figures are to be believed, if they have given out at least 5000 house lots annually for 20 years, this amounts to 100,000 lots. With a promised 30,000 additional lots supposed to come on stream in the next two years, we can see a surplus of housing stock in the near future, and maybe the burst of the bubble that has seen small cottages selling for $10 million and up. Caveat emptor.
Please share this to every Guyanese including your house cats.
Apr 19, 2024
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