December 29, 2007
Happy Holidays, Your Flats Flattened, Off Plan Of Course
While the headline news for "the Broader Middle East" if one accepts including Pakistan in that is certain to attract much learned and unlearned comment (1), some fundamentals of real estate market development, or lack thereof, attract my attention. Flats flattened, off plan, if I may indulge in grim humour as the death toll from a Christmas Eve apartment collapse continues to rise nearly a week after. This hearkens back to a "classic" as eerie signs it: Cairo's Collapsing Buildings. Again, a story of a collapsing block of flats, and doubtless gross underlying corruption.
However, gross corruption is not all, as without any question the heritage of Egyptian State Socialism is as much behind the sad, indeed grossly depressing tale of Egyptian economic and social development since Nasser. Under such circumstances, where secularism was historically effectively synoymous with the ded hand of the vampire state, it is no surprise American efforts at backing faux democracy trickled away into the sand in the face of the Muslim Brotherhood.
With collapsing buildings ordinary news, and a fine illustration of the successes of Arab Socialism there may or may not be great hope for the economic reforms by the old Shrimp Eater, as profiled in the Financial Times this month.
Certainly, there are some small signs of breathing room the beginning of a mortgage market, to keep focus on the housing sector as an example, and Gulfie mega liquidity. is certain to be partially recycled into real estate in Egypt, as evidenced in the second article here
But in the second article's case, I see rather deep room for doubt, as Gulf RE investors like big splashy high end investments - not even for the return, but for 'image investing' (think Trump) - and the infrastructure to address the deep affordable housing deficit, I am not at all convinced really exists. And there, you have the ingredients of explosion. (On the other hand, if it works, perhaps Egyptian films will stop featuring the Job and the Apartment as their main plot drivers as they have for nearly 30 bloody years of unwatchable screetching mediocrity, although that would make me sad as overall the Leb media that has begun to displace Egyptian lumps is far more interesting and has the advantage of not having quite so many Egyptians in it)
Returning to the mortgage market, a closer look at Ms. Saleh's arty is worth a moment, if only for the intro:
Finding a job and obtaining an affordable flat are the two gargantuan challenges facing the majority of young Egyptians as they set out on adult life and prepare to start a family.
Even when work is available, most engaged couples find they are compelled to postpone marriage for several years until they can afford housing. Many a relationship has foundered because the man could not save enough to provide an independent home for his bride-to-be.
As anyone who has suffered through Egyptian "dramas" in the past 20-30 years knows.
However poorly that may speak to the media sector, it speaks rather more poorly to the comptetence of a government and system that at once strangles (strangled?) off private initiative and proved incapable of responding to the development of the country, and so left Egypt to stir in a pot of misery, while the usual suspects on Left especially mouthed pious nonsense about social responsibility...
But now the beginnings of a solution can be discerned with the birth of a mortgage market, even if there are still hurdles for poorer people.
A mortgage law was passed in 2001, but it is only in the past year that the market has started to take off.
“There was a lack of expertise, of regulation, of technicians and of awareness among the public,” says Osama Saleh, the former private sector banker who is now chairman of the Mortgage Finance Authority (MFA), the regulatory agency that has put in place the infrastructure necessary for the market to function.
Total mortgage lending is expected to reach $363m (E£2bn) by the end of this year, most of the deals having been signed in the past two years.
For a country of 80m people, these are still small figures, but industry practitioners say it is only the beginning.
“Mortgage lending is going to escalate very quickly,” says Sahar El Sallab, vice chairman of Commercial International Bank. “The market is so big. We are talking about 10 per cent of the population.”
According to Osama Saleh, 300,000 families are formed every year. He says there is a need for an additional 200,000 units of housing over and above the 200,000 constructed annually.
To encourage people to register their properties – a prerequisite for mortgages – the government has slashed stamp duty, making it a fixed rate instead of a percentage of the price.
Ten percent of the population...well one has to start somewhere. However, 4-5 years after the reform, and still lagging. Of course this review of the banking sector and fine and excellent job the State banks have done in promoting social solidarity etc. (as opposed the rapaciously competent private financial sector, evil bastards actually being successful rather than mouthing pious nonsense)
Some further interesting observations:
Another recent development expected to boost lending is the establishment of the country’s first credit bureau. Egypt is very much a cash society, and historically there has not been much data or analysis available on the credit worthiness of individuals.
The successful completion of a handful of foreclosures in the past year has also reassured lenders in a country where enforcing contracts can be frustrating.
Emphasis added: to say the least although a handful of foreclosures is mere anecdote.
More interesting perhaps is the financial illiteracy of the population and if I may also observe, the severe damage to opportunity that Islamist economic illiteracy has done tothe development of the market and general economic benefit of the population (married to be sure to the economic illiteracies of the secular socialist state):
“We’ve come a long way from where we started,” says Hala Bassiouni, the managing director of the Egyptian Housing Finance Company. “There are now policies and procedures, and the regulator helps us to solve problems.”
She says business has started to pick up, though she cites the lack of public awareness and the soaring prices of real estate as challenges to the market.
“Egyptians are very averse to long-term risk,” says Ms Bassiouni. “I can offer them a loan for 15 years, but they opt to go to the developers who ask them to pay over three years. People believe the banks are ruthless and charge higher interest rates. Developers say their offers are interest-free which is never true, because the interest is embedded [in the price].”
Emphasis Added: One runs into this rather frequently in the region - an utter illiteracy with respect to the concept of cost of financing. And so-called "Islamic" solutions that are "interest free" but in fact embed the same pricing, and indeed rather more disadvantageous pricing into the sale price are presented as being "interest free" and approved as more "Halal" by some ignorant idiot of a Faqih who has as much literacy in real economics of transactions as a "cultural critic" like Naomi Klein - which is to say less than none - and as such prefer empty and superficial form over real economic substance in their understanding. Penalizing the poor ignorant bastards that follow their fundamentally superficial and ill-informed 'advice.' Lack of transparency in pricing, ill-informed comparisons and naive understanding of cost of financing all lead to sub-optimal decisions, but ignrant decisions stamped, in all ignorance of the fundamentals, as "halal."
Taking this aside, or semi-aside, I would note that while I am perhaps neutral on the concept of Islamic financing as such (although I do regard it as fundamentally less efficient, at least at this stage, and even where competitive, something of putting make-up on the same economic pig's ears...), I am personally disgusted at the way it is sold to 'simple folk' under standards of cost disclosure that would be considered near fraud if they were buying "normal" financial products. Halal indeed.
Returning to the issue of housing and market development:
She says another problem is the steep rise in the price of property over the past two years.
“We started with an average loan size of between E£200,000 and E£250,000 ($36,000-$45,000) but now we are approaching E£600,000 ($108,000),” she says. “Now the prices of units have shot up, we are catering to a higher bracket of people. The real problem is the unavailability of properly-priced units to match with the incomes of people”
It means a mortgage is still out of reach for those on low and even middle-level incomes – the vast majority of Egyptians.
To extend mortgages to the poor, the MFA administers a fund that has provided 4,000 homes in the past 18 months. This provides an upfront cash subsidy to borrowers, provided their income does not exceed a monthly E£975 ($175). Mr Saleh says the MFA has disbursed $6.5m in subsidy and aims to make available 14,000 units next year.
But these figures barely dent the demand for low-income housing. Poorer Egyptians have for decades found a solution to their needs by building in slums. But this housing cannot be registered because it is built in breach of laws banning building on agricultural land. Experts say the informal sector accounts for 45 per cent of new units in Cairo.
Emphasis added: here again we find the evil in the contradictions between best intentions of a "regulatory state" and the vampire state that lacks both capacity and will to truly enforce said regulations. While one can easily sympathize with the concept behind the agricultural land reg. in Egypt, it has been clear for at least two goddamned bloody decades that the self same reg. was utterly and is utterly unenforceable, and merely pushes out good money and development, to let in corruption and chaos.
But the pious posturing of activists, of a vampire state lacking enough legitimacy to openly admit the obvious keeps the same evils going.
Also on the same subject and by the same journo: Rich and poor build their own Cairo, which contains this perfect quote:
Unable to provide affordable housing for the poor, reluctant to relax the ban on construction on agricultural land, and lacking the authority to bulldoze illegal buildings, the state simply looked away while the informal areas mushroomed. At the same time, government-built low-cost housing in new desert towns near Cairo failed to attract a critical mass of residents bec-ause of poor transport, the absence of services and restrictions on opening the types of small business that flourish in areas such as Bashteel.
See also an earlier version of the same article, but with some differences.
(1) No I do not find Pakistan a good fit in the MENA rubric. Anymore than Mali.
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The earlier version's bit about Bashteel was a bit clearer, as it mentioned restrictions on workshops as well as small businesses in general.
Jane Jacobs would have had a field day with these loonies. Her whole point in her first and most famous book, Death and Life of Great American Cities, was precisely that building projects for poor folks with no services in them and therefore no places of employment or convenient ways to get the simple things of life was just beyond moronic.
Apparently, they haven't heard of her over there yet.
Although, they never really learned that lesson over here either. You still see them putting in, for instance, single-family or other low-density structures into "cleared" slums, with no storefronts anywhere, as if storefronts and high density were the problems. Urban planners are apparently tough to teach.
Posted by: pantom at December 29, 2007 03:43 PM