From inflation rates to closing costs, there are many factors which impact on an individual’s decision, or ability, to purchase real estate in Trinidad and Tobago. Here, in discussion with AREA’s President Richard Saunders, Republic Bank’s senior economist Dr Ronald Ramkissoon, Town Planner Paul De Gannes and real estate broker Dawn Glaisher from Tobago’s Seajade Investments we take a look at some of those key determinants.
Oil, Gas and Government
Oil, and more importantly today, natural gas, are the foundation of the Trinbagonian economy and its wealth generation has led many to home ownership. But, as Richard Saunders explains, the industry’s importance can be both a blessing and a curse.
“The Trinidad economy is driven largely by petroleum revenues which are under the control of the government, so to a large extent the spend of the government is what determines the ‘energy’ in the economy.”
Trinidad has enjoyed a period of sustained growth and wealth creation in this area over the past 15-20 years. The money has filtered through the economy, be it directly as a result of those employed in the petro-carbon and related industries or as a result of increased Government revenues – through the state oil and gas companies Petrotrin and National Gas Company of Trinidad and Tobago (NGC) or as the result of industry taxation.
“It is the biggest economic factor in Trinidad,” says Saunders. “Oil and gas underpins everything that happens in the economy because the government is the major driver of economic activity. They have control of foreign exchange through the oil and gas and everything is really subsidiary to that.”
The government’s tranche of this money affects the entire economy, including social schemes such as URP (Unemployment Relief Programme) and CEPEP (Community Environmental Protection and Enhancement Programme).
As a result more people moved into the bracket of being able to afford property in recent years and house prices rose in line with the increased demand adds Saunders.
Of course in times of low oil and gas demand there is a corresponding contraction of the amount of money generated, and circulating, with resulting implications for people’s ability to purchase real estate.
Tobago and Government
The sister isle is similarly affected by oil and gas revenues as its annual budgetary allowance, from central government, is necessarily determined by how much money is available. However, local governance, in the form of the Tobago House of Assembly (THA), has also had a major affect on the housing market.
In 2007 the THA intervened directly, on the premise that house prices were outstripping the ability of locals to afford them, and implemented a land licensing system. This meant that all foreign investors were required to obtain a licence from the central government before being allowed to purchase land or real estate. The system has been clouded in confusion and to date no such licences have been issued. Dawn Glaisher says it has had a huge impact on an island dependent on the tourist dollar and which had an excellent balance in terms of foreign exchange.
“The decline in tourism was self-inflicted in 2007 with the introduction of the land licence,” she says. “This signalled to visitors that their welcome in Tobago was not wholehearted and they began going to other islands with their investment dollars.
“Take a look north and you will see Grenada, St Kitts, Dominican Republic, St Lucia and other islands thrusting forward as we slowly decline. It is difficult to explain the apathy of government/THA towards tourism in Tobago when it is universally acknowledged as the major private sector employer on the island.
“Loss of real estate sales can be traced to the effect of the land licence, its knock-on effect on the local investor, and then in October 2008 came the global economic crisis and credit strangle-hold.”
The THA has also become a significant purchaser of land as Glaisher explains.
“Other than investment for tourism the State has been buying up land to meet the housing needs of the growing or more affluent population, as well as agricultural land to protect the future of food production. The state has also purchased to protect beaches, as with Courland Estate, or areas of national significance such as Pigeon Point and Goat Island.”
Individual Earnings and Unemployment
The rate at which people’s earnings increase and the number of people employed in the economy determines the number of people that will be in a position to purchase real estate explains Saunders.
“Every year there is a certain number of people that qualify to, or have reached a level of economic activity that will allow them to, purchase real estate.
“There has been a rapid increase at the lower end because we had almost full employment. A lot of people came into that bracket of being able to afford a property or to rent, or to begin planning to buy land or to build, which was not possible for them previously.
“It started from that low end and went straight through the system as wages have grown a lot over the period. For example a labourer is getting TT$200 a day which is TT$4,000 a month. It ripples through and you have more and more people that can get into high-end properties and afford mortgages of TT$20,000 a month buying a TT$2+million property, there are more people like that.
“Similarly more people at the low-end are coming in and creating demand in that property bracket.”
In Tobago, employment comes almost entirely from two sources – local government and tourism.
“Tourism is the only major private sector employer and accounts for at least 15,000 jobs,” says Glaisher. “The health of that sector reflects the wealth (disposable income and foreign exchange) of the island. Right now we are experiencing tourism arrivals that are minus 50% of our best year, 2006. This drop in arrivals impacts directly on jobs, banks, support industries such as food and alcohol, and real estate. You can track the losses into areas such as Stamp Duty and foreign exchange.”
The dependence on tourism is something which the THA is looking to address and the Cove Eco-Industrial and Business Park (CEIBP) is one of the answers. Prospective tenants for the 140-acre industrial park include light industries, a micro-entrepreneurial complex and an electricity generating plant, and it will also provide a liquified natural gas (LNG) hub for the Eastern Caribbean.
The success of Cove has the potential to determine thousands of future jobs for Tobagonians and the emergence of new industries on the island. Employment security within industries not as capricious as tourism will affect people’s decision-making regarding real estate.
“In Cove Estate, the THA has made an investment for the diversification of the island away from dependence on tourism,” says Glaisher. “This eco-industrial park planned since the late 1990s is still not a reality, but at least it is on its way and offers some economic potential that could survive independent of the tourism sector.”
House and land purchases are not simply for individuals or families that wish to buy a property in which to live, they are also for investment. The robust health of the Trinbagonian property market over the past decade spawned many property speculators and investors and there presence, or lack thereof, has become another driver of real estate demand and purchase price.
This phenomenon, as De Gannes states, helped force property prices to a point which excluded many young first time buyers. He adds, however, that the shrinking returns of the past two to three years had, even before the current economic downturn, seen a reduction in investor activity.
“The market has been driven a lot by speculators in recent years, buying in at the start of construction and then hoping to re-sell at a profit by the end of the development. It was the case that, say you have a development of 10 townhouses being built, investors would buy in at the start of construction and get a profit on completion. But, because of increased construction costs leading up to the end of 2008, speculators had effectively spent themselves out,” he says.
“Every step along the way, someone was making a profit so that the returns for the final investor were shrinking and hence that market has shrunk. If you’re building and labour costs have gone up by 20%, that’s cutting into your profit.
“Also there will only be so much speculator money out there and it will be tied up in a lot of projects. In Tobago, real estate investment is very sector-specific.
“The market is driven almost entirely by the potential of the tourism sector,” explains Glaisher. “Because tourism has been declining over the past two years local investors have slowly stopped investing in property, since the return is not likely to be there anymore.”
Supply and demand
Basic economics says the key components of price in any market are supply and demand and it is no different with real estate. Saunders states that there is a residual demand for housing in Trinidad and Tobago.
“There are over 100,000 people, based on Government forecasts, waiting to enter the housing market. I would say that is fairly accurate.”
However, he adds, even though people may want to buy a house other economic factors, such as employment and earnings, may restrict their ability to do so. In the past few years, housing construction had not been able to keep pace with demand but more recently, Saunders points out, some areas of the market have in fact gone into over-supply. “There are a number of high-end projects currently that will take some time to be absorbed into the market as the demand for them is just not there at the moment.” He added that this excess supply should soon be reflected in a fall in top-end prices.
In the developed world, interest rates are seen as a key decision-making determinant for prospective purchasers of real estate. This is not the case in developing nations such as Trinidad and Tobago.
“I don’t think they make such a difference. Whether the interest rate is 7% or 9%, the main driver is purchase price,” says De Gannes.
But why should Trinidad and Tobago and other Caribbean nations buck the trend of the developed world systems? That they are ‘developing’ is one of the principal reasons explains Dr Ronald Ramkissoon, Republic Bank’s senior economist.
“Interest rates in T&T and the Caribbean have historically been high compared to developed nations such as the US or UK. This is because risks in developing countries, such as underlying financial structures, the framework of the system, risks of doing business, etc, are higher than those in the developed world, or were thought to be until recently,” says Ramkissoon.
“Secondly, Trinidad and Tobago specifically has been experiencing a period of sustained high inflation, double-digit in fact for some time. Our economy has been overheating and the Central Bank (CB) has sought to deal with that by raising interest rates.
“The US has a different problem in that it wishes to stimulate growth. If the economy is slowing and the inflation rate is low then a traditional method of doing that is to reduce interest rates, which is what we are seeing at the moment.
“The reverse is true of T&T because we are coming out of a period of overheating and our inflation rates remain high. In this case interest rates will normally remain high as well because you don’t wish to overheat the economy still further by releasing more money into the system.”
A third reason for interest rates remaining higher in the developing world is its dependence on imports.
“Expenditure by the Government, or significant expenditure by anyone for that matter, in the US generates a huge amount of domestic demand. The reverse is true of developing nations because we are small and dependent on imports.
“If interest rates should fall too low in Trinidad and Tobago, and therefore drive credit expansion, it then means that your imports are going to rise and you would stand to lose foreign reserves at too rapid a rate. This is not the same in the US.”
Stamp Duty and Government Taxes
In some countries government taxes on property transactions can be a significant deterrent, not so in Trinidad and Tobago says Saunders. “Definitely not those on the low end because Government has reduced the tariffs and widened the bands so that you get zero and low amounts on less expensive properties. “Also our property taxes here are low, especially when you look at what is paid internationally. In fact I think the government will have to revisit that because it’s way out of line with what you would pay in the US for example. “It’s not realistic when you look at some of the older bigger properties that would sell for many millions and they are paying taxes in the hundreds, not thousands, annually. I have heard that the government is acquiring new software with the intention of revaluing properties for taxation purposes, so it sounds as if something is in the pipeline.”
Downpayment and Closing Costs
Downpayment and Closing Costs can be a limiting factor argues De Gannes, an AREA member for 10 years who runs his own Town Planning Consultancy Business in Newtown.
“Downpayment and closing costs combined can be around 20% of purchase price,” he says. “On a TT$2million property that’s TT$400,000 you need to be walking around with in cash. Not many people have that in their back pocket.” He says it is one reason why house prices have been coming down. “People say the market is slowing down but I would say that rather it is adjusting itself.”
The recent economic downturn has shown the folly of a lax lending culture that was pursued seemingly without regard to its potential consequences.
It has led to a thorough examination of the financial sector and, with regard to real estate, the terms by which mortgages are extended. In the UK this has meant many banks greatly increasing the initial deposit required, reducing the earnings per loan ratio and significantly tightening other areas of their lending polices. It is not a process the Trinbagonian banking sector has had to undertake.
“In Trinidad lending criteria are already fairly tight because the banks here don’t have that sort of system where bankers are trying all means, special offers, etc, to get people to take on loans that they cannot sustain or support,” says Saunders.
“And the banks are fairly conservative here in the way they handle mortgage transactions. In fact a lot of banks have increased the equity participation of the purchasers when it’s a high-price property, it’s not 10% now they want more like 30-40%. “All of that is to minimize their risk and that if they have to sell in a depressed market they could at least reach a breakeven position.”
Trinidad and Tobago is, unfortunately as Dr Ramkissoon has stated, no stranger to double-digit inflation and this impacts the real estate sector in two significant ways. Firstly, if the costs of items you purchase on a daily basis (such as food) are rising at a greater rate than your earnings you are, in real terms, getting poorer. There is less money left in your pocket at the end of each month for mortgage payments, hence the mortgage you can afford is lower and you drop further down, or off, the housing ladder. More directly, inflation means the cost of constructing a property, both materials and labour, may rise beyond your financial reach.
The construction costs trend had, until the first three months of 2009, been upward and as De Gannes explains, this has affected the affordability of property. “The million dollar apartment is an extinct animal for the last two years so let’s say you buy for TT$2 million and you’re borrowing. You have to be earning 1% of the sum you’re borrowing, that’s TT$20,000 a month. It’s roughly three times, so the combined salary has to be $60,000 a month qualifying income. How many people can do that? “It’s expensive and the reason a lot of younger people are being priced out. What you find in some instances is that parents may help out.” Since the start of 2009, inflation has started to fall back but all things are relative and Saunders says he does not expect it to fall much below 9%.