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Housing boom or bubble?
FE Report
2/1/2006
Residential values have recorded a growth of up to 35 per cent in some areas in the city in the last one year. Can the prices go on increasing?
There is a lot of talk about whether certain areas in the capital are experiencing a real estate bubble. Residential capital values in many areas of the city have recorded a growth of about 40 per cent in the last one year.
A lot of talk has been floating around the news media lately about the "bubble" theory of real estate. It is perceived that the real estate market values have reached unsustainable levels and they will burst like a bubble.
Can these prices just go on increasing? Or will they suddenly stop and then fall steeply?
The cost of apartments around Dhanmandi, Baridhara or Gulshan increased by nearly 50 per cent over the year. The per sq.ft price at the moment in these areas is over Tk. 3500 against Tk. 2000 to Tk. 2200 a year ago. This syndrome is called by many as boil.
A real estate bubble occurs when housing prices take an unhealthy climb instead of rising gradually with the rate of inflation or the rise in median incomes. When the bubble bursts, housing prices tumble, which causes the real estate market to collapse, often followed by a recession in that area.
A developer says the price increase has been fuelled by abnormal rise in land prices. "Land scarcity reached its highest level and the owners are exploiting us like anything, " he adds. Besides credit lending institutions willing to lend a higher proportion of the total value as a loan and increased repayment periods also made houses more unaffordable.
Also, with companies having realised that the demand for housing is increasing as Dhaka offers better infrastructure than many other cities.
In this bullish market, developers say, home buyers need to make sure that they don't overstretch themselves and limit the housing costs to a manageable proportion of the family's gross income. Home buyers should also not assume that their asset will continue to appreciate at the fast pace that it may have in the last couple of years.
So while statistics are relevant, it is also important that a home buyer talks to local real estate agents, neighbours, developers, investors and housing finance companies to get a better picture of what is going on.
A home buyer should not look at broad statistics. He should be concerned with the average prices in the particular neighbouring locations in which he buys houses and the changes in capital values from last year to this year.
Like any other large city, the availability of developable land in Dhaka city is limited leading to increased demand for projects in prime locations. At its basis, the housing market is all about supply and demand: when more people want to buy than sell, prices go up, and vice-versa.
So there is a need to make sure that all the stakeholders in the housing sector - development authorities, regulators, housing finance companies, banks and developers - work together to check the speculative angle in rising residential property prices.
However, the residential market in the city has typically been an occupier or end user driven market rather than an investor driven market. Most developers confirm that majority of their sales still happen to end users and not investors or speculators.
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