Homes or real estate? imbalances in the housing sector in Egypt

Aerial view of Madinaty, 2012. Courtesy of Faris Knight via Wikimedia Commons.

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“A house has the character of the person who lives in it” is an Ancient Egyptian proverb that still rings true today. Egyptians associate their homes with their social status, livelihood, and personal identity. The problem arises when these homes become inaccessibly priced.

A real estate bubble has been under discussion since 2012, but Yehia Shawkat, author of the book ‘Egypt’s Housing Crisis’ asserted that the housing crisis can be dated all the way back to the 1950s and Nasser’s socialist rent controls.

The concern, however, is not with when it started, but with where it is going.

With the current rise in prices that took place in March of last year, Ayman Sami, country head of real estate and investment management firm JLL Egypt stated that “The devaluation coupled with the high rate of inflation has pushed up the construction costs, which meant for the developers that their profitability has been highly impacted. In terms of the market dynamics, we have seen buyers rushing to buy real estate, and this is due to the fact that they would like to hedge against the drop in value of the local currency against the dollar.” This surge in demand, coupled with an increase in cost of materials, could mean that prices will continue to rise.

Bubble or business as usual?

A real estate bubble, or housing bubble, is a demand-driven surge in prices due to factors other than the fundamentals that typically determine prices.

In Egypt, this price increase is illustrated by a report by the Egyptian Center for Economic Studies (ECES), which determined that between 2010-11 and 2016-17 real estate activities rose by 952 percent.

In his book, Shawkat stated that Egypt is “building at almost double China’s rate.” Nevertheless, there is a disparity between those who live in luxurious gated communities east and west of Cairo and those who live in informal housing, often lacking access to basic public services.

In 2016, Daily News Egypt reported that real estate developers predicted an imminent bubble in Egypt as citizens viewed real estate to be a “safe investment” and rushed to buy homes, which in turn compelled companies to increase prices.

Furthermore, borrowing from banks would only add on to the total price through interest rates. If the real estate sector becomes dependent on debt to finance its projects or consumer purchases, a burst could be drastic, as it was in the American housing market in 2007— especially given an increasing number of vacant units, which the Built Environment Observatory (BEO) says reached 27 percent, or 6.4 million units, in 2016.

The emergence of a bubble is epitomized through an anecdote reported by Quartz when one hot afternoon, hundreds of people swarmed to real estate developer Mountain View hoping to buy a home and “dump it in 30 days to make a 100,000 LE profit […] as real estate values were increasing by an average of 30-35% in 2016.”

There are, however, opposing views to the bubble argument. For instance, SODIC managing director Magued Sherif stated that this bubble was a myth and does not exist. He believes that the high demand for real estate as a valuable asset of investment for future generations has kept this sector strong and that real estate was a healthy “boost” to the economy and not a “closed bubble.”

He is not the only one to think so; Hesham Shoukri, chairperson and CFO of Rooya Group, agreed with Sherif, believing that the constant rising prices are a testament to the sector. Moreover, Ian Albert, regional director at Colliers International Middle East and North Africa called the real estate sector in Egypt “a success story.”

Not all housing is created equal

However, the real incongruity goes deeper than this. In her paper ‘Housing Bubble in Egypt: Is it a Fact or Myth’ Rania Nasreldin reported that in 2017, Egyptian real estate recorded EGP 66.61 billion growth with foreign investors from the UAE and Saudi Arabia rushing to join the game. The problem was that most of these developers would target high income groups, leaving a large portion of Egypt’s ever accelerating population with “deteriorating housing stock, informal housing and slums expansion” while saturating the market with inaccessible housing.

Writing after the 2016 devaluation, Nasreldin explained that “The flotation of the pound will improve Egypt’s external competitiveness, and thus attract more foreign investment into the real estate market, but the developers will target high income housing,” adding that the number of units being constructed “does not meet the real demand and therefore the housing problem increases every day.”

While the USD 45 billion promised land of the new administrative capital is being finalized, the World Bank cited a housing gap of three million units that exists mostly in low-income areas that do not receive sufficient investment.

Nonetheless, Nasreldin remains optimistic as she believes some guidelines could help “the efficacy of the housing market in Egypt.”

Real estate reliance

According to the ECES report, 16.2 percent of GDP stems from the real estate sector. The large portion of real estate in total GDP, and the heavy focus on high income housing, means that any crisis in this precarious structure could negatively impact the economy.

Shawkat echoed a similar sentiment, explaining that any hopes of the bubble bursting anytime soon—meaning deflation of housing prices—will only have drastic effects on the Egyptian economy that “are toxic to all involved.”

The first people to be affected in a possible recession will be the construction workers who perform arduous duties with low wages and are “the foundation of the construction industry.” This would lead to higher unemployment rates that will not only take a toll on the economy, but also add to these workers’ personal hardship. After this, the supporting industries dealing with materials and finishes will be affected leading to “a shrink in the economy as a whole.”

Regulation, encouraging investment in middle and low income housing, and viewing housing as a human need before an investment are some ways to move towards stabilizing prices. As Shawkat said, “housing should become less about real estate and more about homes.”

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