- A wobbly real estate sector nearing what might be described as a “bubble,” driven by political instability and unjustified valuations.
- There exists a mismatch between purchasing power and real estate valuations exerting corrective pressures.
- People who depend on current income in Lebanon are almost ALL priced out of the market.
As the title clearly states, this article is about the real estate sector in Lebanon. It will be the first of many articles, as it is difficult to capture all the intricacies of this sector in only one article. In this first article, I try to understand the current situation of the sector, I also analyze current market prices and compare them with other countries. The idea for the article stems from the fact that real estate has been the sector of choice for most investments in Lebanon for the past 5-6 years as prices rose dramatically during that period.
Current Situation: At the present time, the situation of the real estate sector in Lebanon is not great. It is characterized by very low activity (very few transactions) and decreasing prices (this is a new trend that is almost never clearly stated). I believe there are two main reasons for this condition: first, the unstable local and regional political situation is seriously deterring people from investing big sums of money into fixed assets while unsure of the future of the country they are investing in. Second, the price levels have reached levels so high that are totally unjustified and out of reach for the vast majority of the people who would normally constitute the real demand. In fact, I believe we are well into bubble territory, and a correction (the extent of which is difficult to determine at this point in time) is inevitable.
Market Prices: Here, let us give a numerical example to illustrate how much the current prices are out of sync with the purchasing power of the people who should be the target audience for this sector. Assuming a price/sqm of USD3,500 (which is the average for most neighborhoods in Beirut), a 200 sqm apartment would cost USD700,000. From a buyer's perspective, a USD700,000 apartment implies a monthly installment of USD5,162 over a period of 20 years (including interest – at the prevailing levels of interest - and registration fees). Now, given the fact that the monthly mortgage payment cannot exceed 1/3 of a person’s monthly income as per Central Bank regulations (that are strictly applied by Lebanese banks); this means that the person buying this apartment should be earning at least USD15,488 per month! Anyone who knows the job market in Lebanon knows that extremely few people make that much money. The consequence of what we explained above is that people who buy out of income are almost ALL priced out of the market; which by itself reduces demand dramatically. What is left is people who buy out of wealth. However, most of these people already have houses (in most cases, multiple houses) and don’t need to buy anymore; moreover it is mostly these people who bought during the past 5-6 years, implying that the size of demand constituted by people who buy out of wealth has shrunk substantially.
Comparison with Other Countries: To make things clearer, we compared real estate prices in Lebanon with ones in few countries around the world selected randomly (we tried to avoid countries that have special situations like Monaco, or are in wars like Egypt or Syria). The table below illustrates the findings:
This table shows that in real terms (comparing apples with apples), real estate prices in Lebanon are the highest among the 8 countries present in the list as the ratio of average real estate prices / GDP per capital is the highest. If we take this same logic further, we can compute how much should the price of m2 in Beirut be if the ratio of price/sqm to GDP per capita would be similar to the other countries in the list. The table below illustrated the findings:
So, this table shows that if real estate prices in Beirut are to be the same as in Dubai (relative to purchasing power parity), the price/sqm in Beirut should be of USD1,381 while in reality it is of USD3,591; meaning that the current prices are 160% higher than what they would have been if we use Dubai standards! Same logic applies for all other examples, so prices in Beirut should have been of USD2,357 instead of the current USD3,591 if we were to follow Montevideo’s levels (Uruguay is a country that we chose on purpose as it has many similarities with Lebanon, size of population for instance).
The conclusion of what was stated above is that current real estate prices in Lebanon are very high and unjustifiable, both in comparison with other countries in the world (countries that have much better economies, security, and stability) and also relative to what the people in Lebanon can afford.