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The real estate problem

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Housing barrier: the need to make a 20 per cent down payment is a clear barrier to entry into the real estate market for many Bermudians

I was pleased to hear when listening to the Speech from the Throne on November 9 that the Progressive Labour Party has declared to all of Bermuda that it is “determined to provide relief to hard-working families” regarding the interest rate and the amount of the mortgage being paid by families for their homes.

I first addressed this economic challenge on March 16, 2018, with an opinion piece entitled “The interest rate elephant in the room”.

My exact words were “The lending rate in Bermuda stands at a crippling 6.5 per cent to 7 per cent as compared with as low as 2.5 per cent to 3 per cent in North America. To the uninformed reader, the numbers may not mean much, but at the end of the day they determine whether our monthly payments are going to be $2,600 or $4,500”.

On October 23, I returned to this argument with “Escaping more prolonged recession” to protest the banks’ announcement that they are increasing the lending interest rate because US banks are increasing their lending rate. “Bermudians lived through the six-year recession with no downward movement in the interest rate while other nations’ banks lowered their interest rates to almost 0 per cent to keep their economy stimulated. Most of these economies were out of the recession in a year or two because their central banks moved in to address the money supply ... Ironically, now that the world’s interest rates are rising, so are ours”.

So I applaud the PLP for stating that its intention this year is to provide relief in the rates hard-working Bermudian families must pay for our mortgages. This lowering of the rate will have the effect of attracting more people to the real estate market as mortgages would be more affordable. It will also dramatically assist the economy by putting their additional disposable income back into local businesses and the economy.

As an entrepreneur, I am a firm believer in the free market; however, it is difficult to support the banking industry when during the six-year recession the banks did not lower the interest rate, and because of that many people struggled immensely to make payments. A lot of Bermudians, unfortunately, lost their homes during this period. The recession lasted much longer than necessary because the interest rate remained so high.

It is even harder to support this industry now that it is raising our interest rates and mortgage payments because the United States is raising its rates. In summary, when global rates lowered, Bermuda’s rate remained very high and now that global rates are rising, so are ours. Should this be allowed to occur? Therefore, I am hopeful the PLP will do something about this real problem this year, as it has proclaimed.

This whole real estate disaster culminated in about 2008 in the US and then around the world when the banking sector collapsed from the weight of its own greed. As I recall, banks were lending money at artificially low interest rates only to have those rates spike later on unsuspecting borrowers. The scheme was worsened as the lenders started to sell these mortgage packages to each other in a pyramid scheme that eventually collapsed on borrowers and those banks holding the mortgage bag.

Governments were forced to intervene to avert a total global economic collapse. This intervention did not stop billions of dollars being wiped out of the stock market. Huge multinational companies went bankrupt, while other global institutions were rescued under the mantra of they were “too big to fail”. As expected, homeowners were hit the hardest having their properties completely devalued and paying a mortgage on a property worth only a fraction of what it used to be. Countless millions of people lost everything.

The Bermuda real estate market and our economy were not unscathed during this disaster. Ours was a bit different in that the government at that time was caught asleep at the wheel. It was recklessly spending and when the global mortgage disaster hit, it was the perfect storm that we could not escape. Homes that were selling for in access of $1.2 million in 2008 are now selling for approximately $700,000.

There are Bermudian homeowners who are now paying for an asset that is not worth what it used to be. We are now faced with the twin trap of a declining asset and increased payments.

This is a real problem for all Bermudians because it affects us all. Working-class families have most of their investments in a family home or, as we like to call it, “a piece of the rock”. Young families make their first major and lifelong investment in the real estate market. The less money they have after paying their mortgage leaves less money in their pockets to spend elsewhere to stimulate the economy. Rents are also higher to assist with paying the mortgage.

While applauding the PLP, I would like to caution the ruling party that this issue should not have such a narrow focus. It cannot seek only to attract banking competition to reduce rates, which is going to be a challenge. It cannot seek only to reduce the mortgage rate to assist Bermudian families and the economy.

It should definitely steer clear of its disastrous policy of building low-cost housing that no one can afford and putting even more downward pressure on the real estate market.

I also challenge it to get banks to address the very high cost to even enter the real estate market. At present, banks require a 20 per cent down payment on any purchase of real estate. A home that cost $700,000 would require a young working family to have saved $140,000 — and this does not include lawyer fees, real estate fees, taxes or any furniture and renovations required to make it livable.

This is a clear barrier to entry into the real estate market that is keeping this sector in economic stagnation. After this major upfront investment, the family now have a mortgage of nearly $5,000 per month for the next 30 years.

I recognise the balance of banks making an attractive profit; however, inflated interest rates and an unreasonably high down payment are a clear indication why hard-working Bermudians are unable to enter the housing market. It also puts a severe burden on those making very high mortgage payments in our weak economy.

Attracting first-time buyers is key to a healthy real estate market. They are the ones who expand the market. A healthy real estate market is crucial to building the wealth of the working class and the best hope of improving generational wealth.

We are all hopeful that the PLP Government will address this and that it does not drop the ball because this is one of the best ways within its grasp to get us out of the recession we are in — and to truly “Put Bermudians First”.

Vic Ball was a One Bermuda Alliance senator from November 2014 to July 2017

Vic Ball