BEIRUT: For a large percentage of Lebanese home shoppers, the beginning of the year held something of a surprise; the country’s subsidized housing program had effectively run out of money.
For very compelling economic reasons, an estimated 90-plus percent of residential shoppers favor two main options for obtaining financing. Either the Banque d'Habitat (the Housing Bank) for those with greater means; or the PCH (Public Corporation for Housing), for those shoppers with lower incomes.
While both programs recently raised their interest rates a nominal amount, the real problem is that after the current batch of loan applicants is processed, the subsidized loans stop for a period of time that is undetermined, and low-interest loans are put on “Hold,” explained Byblos Bank chief economist Nassib Ghobril.
Earlier this month, the Central Bank issued a banking circular that entailed significant amendments to the government’s subsidized loan program. Under the terms of the circular, the Housing Bank raised its interest rate from 3 percent by 75-basis-points to 3.75 percent, and decreased the amortization schedule from the longtime standard of 30 years to a tighter 20 years, thus significantly tightening the terms of the loan.
But without funding for whatever the current subsidized interest rates, the subject of home shopping becomes moot.
Most Lebanese home shoppers – such as families, young executives, those planning on getting married – find themselves effectively priced out of the market without the cushion of a subsidy.
Riad Salameh, Central Bank Governor, in conversations last week with President Michel Aoun at Baabda Palace, said that money extended by BDL to banks in order to keep the subsidy program running for early 2018 has already been exhausted. The Central Bank had provided an additional fund of $500 million in February to assist in meeting obligations. but this amount was almost immediately depleted.
The high demand has an easy explanation, while rates were low, many prospective young home shoppers were lining up as applicants for this government assistance which made residential purchases potentially more affordable.
During the meeting between Salameh and Aoun, the BDL head was asked to secure sufficient money to at least fund those applications that were in process. The money will be taken from a 2019 stimulus program, and transferred to finish any outstanding applications.
After that in the words of one economic observer “Its tough luck for a while.”
Annahar asked a variety of young home shoppers about their plans given the current situation, with the common answer being that there was little question of trying to buy something in the near term, which meant waiting.
For some residential shoppers – such as one engaged young executive Annahar spoke with – instead of the unavailable lower rates of the subsidy program, he is finding himself paying a call on the commercial banking sector, where interest rates range on average between 7 to 8 percent.
Antoine, an engineer, who preferred to simply to use his first name, told Annahar that he is visiting various banks proposing, under the required terms which allow payments of up to a third of monthly salary – or $1,500 – out of $4,500, for an annual mortgage of $18K over the course of 20 years.
One banker, commenting, however, that “even above-average wage earners in general, cannot afford 7-8 percent for 20 years,” noting the knock-on effect this would have on the residential housing market.
He forecasted that the residential shoppers will become renters instead, given the economic adjustment that takes place if citizens cannot afford to buy property.
Ghobril refuted this saying the Lebanese property market does not follow what would be a standard economic mechanism of repositioning from selling to renting – “it is not an efficient market in that sense,” noting that pending a restoration on the subsidy program, the apartments will remain empty.
Albeit, throughout all the above scenarios, developers have found themselves in the position of offering marked discounts from the original premium prices for an average unit in order to move sales.
Subsidies or not, de facto prices - as opposed to advertised prices -- are less and will stay less pending a drastic change in the local economy, wage levels, and disposable income.
One recent home shopper, speaking anonymously, said that he had negotiated a 35 percent reduction in the developers selling prices. This was at the high end of a discount but illustrates the reality.
That there is an overstock of units, and that units were overpriced, to begin with.
Ghobril called for the Executive Branch of the government to inject a further $500 million (750 bn LB) into the subsidy system in 2018 to keep the subsidy system sustainable.
A question, however, is how long this would last in funding the subsidy systems.
On the topic of high commercial banking loan rates, Ghobril pointed that the Lebanese governments record high fiscal deficits places the country’s sovereign debt - its bonds – in near junk status, push interest rates up across the board.
Like many programs in Lebanon, Ghobril said it was easy to consider that residential subsidies were a given economic reality that would continue indefinitely. For the time being, that is not the case.
He noted that based on the government’s planned $17 bn budget being voted on shortly, a sufficient amount could be allocated to continue providing affordable rates for Lebanon’s young home shoppers.
"We are all interested in buying," said one young shopper, adding "but even with subsidized rates, the base cost of average flats are too high."
A banker told Annahar, "I don't see a bubble, or panic," though adding, "A price correction would be the obvious next move by the property sector."
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