Home' Trinidad and Tobago Guardian : June 29th 2017 Contents BG14 | FINANCE
BUSINESS GUARDIAN guardian.co.tt JUNE 29 • 2017
Is the property market fragile?
The introduction of property
taxes in T&T is likely to come
in some way, shape or fashion.
It has been on the cards since
2009 and is not likely to go
away. One of the fundamental
impacts of property taxes is that it creates a
"carrying cost" to owning property.
Previously, you owned a real estate asset
and, other than discretionary maintenance,
there would be no cost to ownership. Individ-
uals who were cash rich could actually hoard
properties because there was no external cash
The introduction of the property tax is com-
ing at a time when there is another dynamic
at play. We are now on the cusp of a post-en-
ergy economy in T&T. Yes we will continue to
find oil and gas and we will continue to have
a vibrant energy sector. However, the world
is changing in such a manner that there is a
structural change to energy prices. This sug-
gests that another energy boom---as we have
witnessed in the past---is unlikely to occur for
some time barring, of course, some exogenous
event such as a war.
The sum of the introduction of the property
tax, increased taxes, in general, and a changing
economic landscape means we need to step
back and reflect on how we view property
both in terms of home ownership as well as
Property has been one of the best asset class-
es for investment in the past. Now we need to
consider if the economic fundamentals support
current valuations and if the circumstances
of the past 20 years are likely to recur going
Let me be clear. There is room for every as-
set class in an investment portfolio so this is
not an either/or discussion. It is, however, an
opportunity to pause and reflect on some of
the things were once held as inalienable truths
and whether those axioms are still relevant
T&T enjoyed a period of uninterrupted eco-
nomic growth that spanned the early 1990s
Within that 15-year period, there were pock-
ets of exponential growth fuelled by increased
government revenues from the energy sector.
Since 2008, the local economy has flatlined.
Government expenditure---the driver of the
local economy---is falling. Further, it is being
supported by significant borrowings. The out-
look: it is unlikely that government spending
will increase any time soon and, as the debt
burden grows, more revenue would be required
to service debt than would be available to pro-
mote economic growth.
As the local economy grew during the last
two decades, property prices also increased
exponentially. I have often lamented the lack
of attention to capital market development in
T&T and this has significantly affected the
property market locally as well as the demand
for foreign exchange for investment purposes
(especially to purchase property) abroad.
As the non-energy budget deficit grew, it
meant we were taking rents obtained from
the energy sector---earned in US dollars---and
spending it in the domestic onshore economy.
This is not necessarily a bad thing once it is
sustainable and measured. On both counts it
Once these increased TT dollar flows got
into circulation, they had to find an invest-
Initially, around 2003-2005, that home was
the local stock market as it is the most afforda-
ble, leverage-free investment opportunity for
the average investor. The market soon reached
unsustainable levels and, after a period of cor-
rection, has been bumping along ever since.
What should have happened then was ini-
tiatives to expand and develop the role of the
capital market so that it could absorb the ad-
ditional liquidity in a productive as opposed
to speculative way. This did not happen and so
the liquidity had to find an alternative home.
Around 2003 interest rates began to fall and
government spending increased exponentially.
By 2006, as the stock market topped out,
local property was the investment vehicle of
choice. The role of the Clico EFPA product
in the rise of the property market is not to be
During this period, individuals were able to
borrow to purchase property and, simultane-
ously, take out a high interest EFPA investment
and use the proceeds to offset the interest cost
on the property. At the same time, they could
use the rental income to generate equity in the
This all equated to an almost "free lunch" to
those with the resources. Property prices grew
significantly during this period and home price
affordability became challenged. The financial
crisis of 2008 resulted in an estimated 20 per
cent fall in local property valuations but many
who were, by now, both asset and cash rich
were able to easily navigate this hurdle.
As the market settled down in 2012, the in-
vestments into local property continued and,
at this time, attractive valuations in the US
property market were the investment of choice.
This has the impact of channelling US dollar
flows outside of the country.
We are now at 2017 and US dollar flows for
investment purposes have dried up. Econom-
ic growth is muted at best. The cost of living
has gone up significantly and more persons
are losing their jobs due to the challenging
The economic dynamics are changing and
this must affect the dynamic of all other
markets with the property market being no
Conservative estimates suggest that proper-
ty prices have averaged an annual growth rate of
at least 10 per cent over the past 20 years. This
is not withstanding the 20 per cent decline in
the market post the financial crisis, which by
most accounts have not yet been fully off set.
In terms of numbers a property that sold for
$250,000 20 years ago would be worth $1.7
million today assuming it has been properly
maintained. That is a significant rate of in-
crease and it means the returns on property
would have likely outstripped the returns on
any other TT dollar asset class.
As with any asset, the price will only increase
if people are able to afford---or are willing to
pay---the marginal increase in the price. There
is enough anecdotal evidence to suggest the
market is at an inflection point. This is be-
cause affordability is becoming increasingly
challenged. The number of applications for
public housing that are in the system is further
evidence there is a challenge with affordability.
This is likely to become more so as taxes are
increased and the cost of living rises.
Further, interest rates are on an upward trend
and while the Central Bank seems intent on
keep rates low for as long as possible, this is
taking place at a time when the US is on a rising
interest rate path. Our current stance places
further pressures on the exchange rate.
For additional context, consider that if your
salary in 1997 was $2,500 per month then you
would now have to have a salary of $17,000 per
month in order for your salary to have kept pace
with the rate of property price appreciation.
Since your other living expenses would have
increased, the ability to afford multi-million
dollar properties became a function of other
Transfers and subsidies to fuel, electricity
and for children's education are some exam-
ples of how the public was able to keep pace
and be able to afford the exponential growth
in properties. Low interest rates were another
factor and high levels of liquidity supported
this. Scarce labour and increasing cost of
materials meant that replacement cost was
These dynamics are changing even if the
price impact is not immediately observable.
This is not unusual for a fairly illiquid asset
class where price comparable and price deter-
mination are not always transparent.
One of the key mistakes we make in assessing
the property market is to confuse market vol-
atility with market fragility. Volatility reflects
the up and down movements in prices which
is not a feature of our local environment, at
least not for the past 20 odd years.
Fragility, however, speaks to the support
that exists for prices at a particular level. If
the fundamentals are not supported a market
may not be very volatile for a long period but
then there could be a sudden move. We see
this often in the stock market.
The point of this column is to focus the dis-
cussion rather than make recommendations.
No one can argue that the market dynamics
are changing. How those changes impact on
prices will be revealed over time.
Ian Narine is an investment adviser registered
with the SEC and can be contacted via ian.
Links Archive June 28th 2017 June 30th 2017 Navigation Previous Page Next Page