Oversaturated and About to Crash?

by Ernest Hanson

When driving around parts of Accra, casual observation of multiple "To let" or "For sale" signs could easily be interpreted as an oversupply of housing stock or an impending property bubble in the Accra real estate market.

Sometimes our general observations seem to counter what we usually read in the papers regarding a 1.7m housing deficit and growing homelessness. There seems to be a co-existence of over-supply with under-supply in Accra's housing market. Whilst our heading may seem strange and provocative, especially coming from a developer, we hope that `some of our insights will trigger previous personal experiences and observations which help our reader to answer the question posed above.

A housing bubble can be defined by increasing property prices fuelled by demand, speculation and exuberance creating a cycle where more speculators enter the market, further driving demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices — and the bubble bursts.

From my basic understanding of historical property market crashes, speculation is often always supported by leverage (debt and mortgages). These have been the core factors driving international property price crashes.

Real estate bubbles are invariably followed by severe price decreases (also known as a house price crash) that can result in many owners holding mortgages that exceed the value of their homes. In the USA for example, over 11.1 million residential properties, or 23.1% of all U.S. homes, were in negative equity at Dec. 31, 2010.

I believe public discourse around a pending real estate market crash in Accra stems from the application of some of these historical financial market crashes in more developed markets. Whilst the Ghana property market has seen some speculation in land and property, the lack of leveraged financing and institutional investors have not created the same adjustment mechanisms one would find in other markets.

Firstly, in the segment we operate in, (middle to high income or $75,000 to $250,000 price bracket), we find that mortgage buyers constitute less than 10% of home buyers. The point here is that debt has been key in fuelling property price bubbles across the world. In Ghana, mortgages are growing from a very low base and constitute a small proportion of buyers. In addition, Ghanaians seem to more averse to sell anything property culturally: the same forces that push people to sell in Europe or America are not always at play in our local market.

The lack of mortgage buyer's means most market corrections will be via rent or occupancy levels rather than through house prices. Nevertheless, savvy investors focusing on return on investment should invest in property that best matches the needs of the new pool of prospective tenants and in property stock that generates the best yield over the longest property cycle.

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Ernest Hanson is the Managing Director of Beaufort Properties. You can contact them on +233 268-315-111 or ernest@beaufortghana.com. He and Scot Murray, Managing Director of Denya Developers, write columns on the property market in Accra.