No stim­u­lus, no prob­lem

The po­ten­tial sil­ver lin­ing in the re­stric­tion of sub­si­dized mort­gages

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Since 2013, Banque du Liban (BDL), Le­banon’s cen­tral bank, has an­nounced over $6 bil­lion in an­nual stim­u­lus pack­ages to prop up the coun­try’s fal­ter­ing econ­omy. A range of sec­tors, from en­ergy to ed­u­ca­tion, have ben­e­fited from stim­u­lus­fa­cil­i­tated credit, but none more so than the real es­tate mar­ket. Year af­ter year, prop­erty de­vel­op­ers and con­sumers have grown to ex­pect and rely on the dis­burse­ment of BDL-sub­si­dized mort­gages, which have at­tracted the lion’s share of the govern­ment’s stim­u­lus money.

For years, bankers and real es­tate ex­ec­u­tives have said that the mar­ket is driven al­most en­tirely by pur­chases with sub­si­dized loans. Per­haps this is why the lat­est bil­lion-dol­lar stim­u­lus pack­age caused such a stir fol­low­ing its an­tic­i­pated but de­layed an­nounce­ment. On Fe­bru­ary 2, new mea­sures were in­tro­duced through Cir­cu­lar 485 that hiked mort­gage in­ter­est rates, tight­ened qual­i­fi­ca­tions, and short­ened ma­tu­ri­ties on sub­si­dized hous­ing loans for cer­tain banks. For the first time, BDL pre­de­ter­mined a $500 mil­lion tranche of the stim­u­lus pack­age to be dis­trib­uted among banks for 2018. But on Fe­bru­ary 23, BDL’s gov­er­nor, Riad Salameh, re­vealed that sev­eral banks had al­ready nearly ex­hausted their quota of stim­u­lus funds for the year. Fur­ther­more, Salameh added that he would not grant a fol­low-up stim­u­lus pack­age to the bank­ing sec­tor as he had the year be­fore.

While the re­stric­tion of mort­gages and the early de­ple­tion of ear-marked sub­si­dies may sound alarm­ing to prospec­tive home buy­ers, oth­ers wel­come the no­tion of a real es­tate mar­ket un­in­flu­enced by BDL’s sup­ple­men­tary fi­nanc­ing. Op­po­nents of the stim­u­lus pack­age say that govern­ment in­ter­ven­tions en­able buy­ers to af­ford ex­pen­sive real es­tate and sus­tains hous­ing prices out of the reach of many con­sumers.

“In terms of sup­ply, build­ings are be­ing built and projects are be­ing de­vel­oped, but de­mand is be­ing in­flated by these sub­si­dies,” ex­plains Walid Mar­rouch, as­so­ciate chair of LAU’s de­part­ment of eco­nom­ics. “In eco­nom­ics, we call it de­mand-side man­age­ment. You can in­ter­vene in the mar­ket in two ways—de­mand-side man­age­ment and sup­ply-side man­age­ment—or you can do noth­ing. Usually, de­mand side­m­an­age­ment doesn’t help the buy­ers. It helps the sell­ers. It doesn’t al­low prices to go down. So who ben­e­fits? The banks and sell­ers; the de­vel­op­ers.”

A re­cent mas­ter’s the­sis by Jamila Youssef, a 2017 grad­u­ate of the Le­banese Amer­i­can Univer­sity’s ap­plied eco­nom­ics pro­gram, tracked the ef­fect of mon­e­tary pol­icy on hous­ing prices from 2000 to 2016. Un­der Mar­rouch’s ad­vi­sory, Youssef cre­ated a proxy for real es­tate prices by di­vid­ing the to­tal value of real es­tate trans­ac­tions, sup­plied by the Order of En­gi­neers, with the to­tal num­ber of trans­ac­tions from the Cen­tral Ad­min­is­tra­tion of Sta­tis­tics. Us­ing im­port val­ues as a con­trol vari­able, she stud­ied the new, monthly price-per-trans­ac­tion fig­ures against in­ter­est rates and the loans to the pri­vate sec­tor.

Youssef’s mod­el­ing pro­duced two main find­ings. First, a 1 per­cent in­crease in sub­si­dized loans to pri­vate sec­tor de­vel­op­ers in­creased the av­er­age price of one real es­tate trans­ac­tion by 0.18 per­cent. Sec­ond, a 1 per­cent de­crease in in­ter­est rate in­creased the prices by 0.37 per­cent.

Ob­serv­ing the re­sults of the study, Mar­rouch feels con­fi­dent that BDL’s pol­icy aimed to pre­vent hous­ing prices from de­clin­ing. “When you look at the time se­ries of the data be­tween 2000 and 2016, you no­tice there’s a change in the trend [of evolv­ing real es­tate prices],” he says, in ref­er­ence to the graph of in­ter­est rates and hous­ing prices. “Be­tween 2000 and 2006, there’s a rel­a­tively flat trend; be­tween

2006 and 2011, the trend changes and be­comes steeper. Then, af­ter 2011, af­ter the Syr­ian cri­sis started, it started to flat­ten out. But then, when you look at the in­ter­ven­tion of the cen­tral bank with these cir­cu­lars to sub­si­dize loans and other things, they start to oc­cur when [prices] start to flat­ten ... It seems that the in­ter­ven­tion was there to sup­port the price.”

Ali Ter­mos, a pro­fes­sor of fi­nance at the Amer­i­can Univer­sity of Beirut, charted price-per-trans­ac­tion fig­ures us­ing sim­i­lar data for a study com­mis­sioned by the Min­istry of En­vi­ron­ment. He notes that the proxy seems to re­flect ac­tual mar­ket ac­tiv­ity fairly ac­cu­rately. Al­though By­b­los Bank main­tains an in­dex of hous­ing de­mand, he says Le­banon still does not have a proper, na­tional hous­ing-price in­dex that tracks the value of in­di­vid­ual prop­er­ties over time.

RAMCO Real Es­tate Ad­vi­sors mon­i­tors the prices in Beirut’s down­town area for projects start­ing at $3,000 per square me­ter, and has found mar­ginal de­clines un­der 2 per­cent in re­cent years. How­ever, these are ask­ing prices, and are not rep­re­sen­ta­tive of the mar­ket as a whole. Anec­do­tal re­ports ac­knowl­edged by RAMCO sug­gest that de­vel­op­ers are of­fer­ing sub­stan­tial dis­counts of up to 30 and 40 per­cent in order to liq­ui­date their stock.


In light of the re­duc­tions of fi­nal ask­ing prices, some economists have cast doubt on the in­fla­tion­ary ef­fect of the stim­u­lus pack­ages. Nas­sib Gho­bril, chief econ­o­mist at By­b­los Bank, says, “Hous­ing prices de­clined since 2011 af­ter the boom years, and the mar­ket was stag­nat­ing, so mort­gages were taken for spe­cific sizes for small apart­ments in gen­eral. We have been in a buy­ers’ mar­ket for real es­tate, so there was no risk of price in­fla­tion be­cause of the stim­u­lus. It was a way to gen­er­ate de­mand in a very stag­nated real es­tate mar­ket, and the de­mand gen­er­ally re­mained in the small-size—some­times medium-size—apart­ments.”

On the other hand, Ji­had Hokayem, a lec­turer in real es­tate in­vest­ment strat­egy at the Le­banese Amer­i­can Univer­sity, be­lieves that the coun­try is in for an im­pend­ing wave of price de­clines due to a slump in oil prices from 2016. Cit­ing his own re­search, Hokayem tells Ex­ec­u­tive that the fall­ing value of hy­dro­car­bon re­sources has weak­ened oil-de­pen­dent economies in the re­gion where Le­banese ex­pats of­ten work. As a re­sult, re­mit­tances to Le­banon will even­tu­ally de­crease as well, re­duc­ing lo­cal pur­chas­ing power and erod­ing hous­ing de­mand. By Oc­to­ber of this year, Hokayem pre­dicts that prices could fall as much as 55 per­cent from their peak in 2011. This, he says, cre­ates a dilemma for BDL.

“The cen­tral bank has to de­cide whether to de­fend the Le­banese pound or to de­fend the Le­banese mar­ket, be­cause it doesn’t have enough funds to de­fend both. We can­not keep on pump­ing money,” Hokayem tells Ex­ec­u­tive. “[The] real es­tate sec­tor is [worth] tril­lions of dol­lars. You can­not pre­vent its crash. So let’s ac­knowl­edge the prob­lem.”


Sup­port­ers of the stim­u­lus pack­ages, like Mas­sad Fares, a rep­re­sen­ta­tive of the Real Es­tate As­so­ci­a­tion of Le­banon, say that keep­ing the real es­tate sec­tor afloat is im­por­tant for the func­tion­ing of the econ­omy as a whole. “To make a build­ing, you need 70 dif­fer­ent trades. It ac­ti­vates the whole econ­omy. It ac­ti­vates industry; it ac­ti­vates work­man­ship, the alu­minum, the tiles, the im­port, the ex­port, ev­ery­thing,” says Fares. “When there’s no con­struc­tion, [none] of these peo­ple are work­ing.” Fares adds that real es­tate de­vel­op­ers will lobby the govern­ment to im­ple­ment its own stim­u­lus mea­sures amid con­cerns that BDL can no longer af­ford the sub­si­dies.

The cen­tral bank claims that stim- ulus pack­ages—and the real es­tate sec­tor they sub­si­dize—have been key to sus­tain­ing the econ­omy since they were first in­tro­duced. Ac­cord­ing to com­ments pub­lished in The Daily Star, Salameh stated in 2016 that the in­cen­tives contributed to ap­prox­i­mately 67 per­cent of GDP growth, which the World Bank es­ti­mates at 1.8 per­cent that year. By 2018, he said that 120,000 peo­ple had ben­e­fited from sub­si­dized loans since the first stim­u­lus pack­age in 2013, as re­ported by LBCI in Feb- ru­ary. Economists dis­agree on the ac­cu­racy of these fig­ures but say that it is dif­fi­cult to make an in­de­pen­dent as­sess­ment with­out data from BDL.

Re­gard­less of the stim­u­lus’ cur­rent eco­nomic im­pact, some crit­ics be­lieve that sub­si­dies would be bet­ter ap­plied to other sec­tors. While real es­tate sales may gen­er­ate high rev­enues, those prof­its are ac­crued through one-time trans­ac­tions, ex­plains Mar­wan Mikhael, head of re­search at Blom Bank.

“[The stim­u­lus] is con­tribut­ing to year-on-year growth but its not in­creas­ing the po­ten­tial GDP, which makes it, to a cer­tain ex­tent, un­pro­duc­tive. If you had a stim­u­lus, for ex­am­ple, for a cer­tain in­dus­trial sec­tor, and the in­vest­ment is in­creas­ing po­ten­tial GDP, then at a cer­tain time you stop the sub­sidy, and the sys­tem is able to gen­er­ate growth in the fu­ture, sus­tain­ably. But for real es­tate, the sec­tor by def­i­ni­tion does not cre­ate sus­tain­able growth,” says Mikhael.

If the stim­u­lus were to be cut off, Hokayem thinks that prices would have no choice but to read­just in line with lo­cal pur­chas­ing power. Sub­se­quently, the ex­tra cash avail­able to Le­banese house­holds would be rein­vested in other sec­tors.

“The cen­tral bank has to de­cide whether to de­fend the Le­banese pound or the Le­banese mar­ket.”

“In­stead of al­lo­cat­ing 30 per­cent or 20 per­cent of my salary to pay my monthly in­stall­ment for real es­tate, I can just pay 15 per­cent, and [with] the re­main­ing, I go more to restau­rants, I change the fur­ni­ture of my house. I’m go­ing to make a cer­tain cy­cle in the econ­omy,” Hokayem says. “There will be [a] mul­ti­plier ef­fect and GDP is go­ing to in­crease. So you have to bear in mind that the de­crease in real es­tate is ben­e­fi­cial for the Le­banese econ­omy.”

Whether hous­ing prices would de­flate in line with lo­cal pur­chas­ing power, and how long that would take, is any­one’s guess. In 2018, BDL’s de­mand-side man­age­ment con­tin­ues to in­ject liq­uid­ity into the mar­ket, al­beit in a re­stricted form. The dis­burse- ment of sub­si­dized loans may be set to abate, but low in­ter­est fi­nanc­ing will re­main avail­able through other lend­ing in­sti­tu­tions, such as the Pub­lic Cor­po­ra­tion for Hous­ing and Banque de l’Habi­tat. Prices could con­tinue to drop as of­fers from com­mer­cial banks dry up, but, for the short term at least, con­sumers should plan to bud­get within their means.

The po­ten­tial sil­ver lin­ing in the re­stric­tion of sub­si­dized mort­gages

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