Background Facts:
- Construction of residential housing lots contributes an aggregate 3.6% towards Egypt's GDP.
- Egypt's mortgage market (in terms of mortgages financed, not the entire market) has an aggregate size of EGP 3 billion; a minuscule 0.3% of Egypt's current GDP .
- Egypt has the lowest owner occupancy ratio in the world in 10 years; currently standing at only 32%.
- Egypt currently requires the supply of 5 million low-income housing units.
(Note: Facts are according to statistics provided by Mr. Suha Najar, Managing Partner and Head of Research at Pharos Holdings when he made a presentation before attendees of the American Chamber of Commerce's November 23rd Real Estate Conference. )
...Inflating the Bubble
Over the last decade or so, excess liquidity in the global markets resulted in the creation of a paper market for Egyptian high-end real estate: a market that is driven entirely by speculation; a market in which fundamental forces are totally ignored; and a market in which the underlying dynamics of supply and demand are blatantly disregarded.
The supply and demand situation of high-end real estate in Egypt is in a dynamic state of disequilibrium; with the demand for high-end residential units currently standing at 15 000 units per annum, and supply currently standing at 40 000 units per annum. Hence, this means that there is a supply-demand imbalance in the market; which in this case, is an excess supply of housing units.
Supply-and-Demand economics dictates that prices should fall when supply far exceeds demand, but in the case of the Egyptain high-end property market, this law doesn't currently hold: prices are still sky-high; with prices of unfinished properties far exceeding those of finished properties, i.e. high-end properties in Egypt are increasingly becoming more expensive, when they are actually supposed to be increasingly becoming cheaper. A curious situation indeed.
Therefore, if one were to plot the supply curve for the Egyptian high-end property market it would be slopping backwards; consistent with the nature of supply curves when asset price bubbles are being inflated.
The deviation of high-end housing-prices from their fundamental or intrinsic value cannot continue ad infinitum, because this pattern of divergence of high-end property prices from their fundamental / intrinsic value is unsustainable. Therefore implying that the observed market price of high-end units would have to converge with reality at some point: the bubble is guaranteed to burst one day.
The interesting question is when, and what will trigger the burst?
...Inflating the Bubble
Over the last decade or so, excess liquidity in the global markets resulted in the creation of a paper market for Egyptian high-end real estate: a market that is driven entirely by speculation; a market in which fundamental forces are totally ignored; and a market in which the underlying dynamics of supply and demand are blatantly disregarded.
The supply and demand situation of high-end real estate in Egypt is in a dynamic state of disequilibrium; with the demand for high-end residential units currently standing at 15 000 units per annum, and supply currently standing at 40 000 units per annum. Hence, this means that there is a supply-demand imbalance in the market; which in this case, is an excess supply of housing units.
Supply-and-Demand economics dictates that prices should fall when supply far exceeds demand, but in the case of the Egyptain high-end property market, this law doesn't currently hold: prices are still sky-high; with prices of unfinished properties far exceeding those of finished properties, i.e. high-end properties in Egypt are increasingly becoming more expensive, when they are actually supposed to be increasingly becoming cheaper. A curious situation indeed.
Therefore, if one were to plot the supply curve for the Egyptian high-end property market it would be slopping backwards; consistent with the nature of supply curves when asset price bubbles are being inflated.
The deviation of high-end housing-prices from their fundamental or intrinsic value cannot continue ad infinitum, because this pattern of divergence of high-end property prices from their fundamental / intrinsic value is unsustainable. Therefore implying that the observed market price of high-end units would have to converge with reality at some point: the bubble is guaranteed to burst one day.
The interesting question is when, and what will trigger the burst?
