In today’s Bermuda Sun, Susan Thompson, agency manager for Coldwell Banker Bermuda Realty, was quoted as suggesting

“… in the case of the coveted single-family dwelling, [prices have] levelled (sic) off. They are not decreasing, but we’re not seeing the growth we’ve seen in the years past.

Ms. Thompson’s recent review of Bermudas market from Coldwell Banker’s newsletter is also quoted

In the review, [Ms. Thompson] addressed fears that Bermuda’s real estate bubble would follow the lead of the U.S. and burst. She wrote that it is important “to point out the obvious.”
“Bermuda is not the United States,” she said. “In addition to its sensible lending practices, other factors ensure the continuing demand that keeps prices stable.”

Ms. Thompson is absolutely correct in that Bermuda is not the United States.  However, one may wonder why housing demand has dropped from recent highs.  In order to answer such a rumination, let us consider the potential causes of a recent boom in Bermuda’s housing market.

Bermuda has seen a boom in housing likely due to a number of factors.  As this writer has suggested in the past, it likely began with a shortage of housing for ex-pats.  This when combined with a lack of new housing development and a dearth of changes to planning policy caused much of the beginning of the boom period.

So what happens when a housing market booms and prices get less affordable?  Well, banks begin to run out of customers to lend to.  What do banks do under such circumstances?  They begin to change their lending practices.  In the US, this led to an increase in sub-prime lending.  Yet sub-prime didn’t happen in Bermuda, right?  Perhaps not, instead we witnessed first 5% down, then zero-down and finally interest only loans as local banks attempted to keep their sales up despite rapidly escalating housing prices. 

So banks changed their lending practices, why does it matter?  It matters because it inflated demand at the same time that prices were inflated.  When prices rose due to the housing shortage, banks compensated with 5% down loans, giving access to home ownership to those who couldn’t afford larger down-payments.  When those people ran out, they gave 100% financing loans, giving access to those who couldn’t afford to save down-payments (along with capitalizing on higher rates for having no down-payment).  When those people ran out?  Well, they started giving out interest only loans to those who couldn’t actually afford the mortgages but wanted to believe they were doing something different by renting the home via the bank rather than a traditional owner.

Not really a big deal, right?  Well, actually these lending practices likely have had a similar effect on Bermuda’s market as the predatory lending practices of mortgage brokers in the United States.  Effects which caused a upwards price spiral in housing as a shortage of supply met the artificial inflation of demand.  These effects were likely only further compounded as increasing rental returns and rapidly rising home values caused speculators to jump on board and buy up homes for renting and flipping and for sellers to start thinking they could ask for far more.

This may help explain how in a short few years the price of the average home spiraled up to $1.6 million dollars.  Let us look back at the spiral shall we?

March 2003 ($1 million) – The average price of a piece of the rock? How about a cool $1m

Sept 2005 ($1.15 million) – Real estate prices still going up   

Jan 2007 ($1.6 million) – $1.6m average house price? It’s a distortion says Sir John

and now?

July 2008 (apparently $1 million) – ‘Nows a great time to buy a home’

So, now the question to ask yourself is how did we go from an average home price of $1.6 million down to $1 million in just over a year?  Let us examine potential factors, shall we? 

First off we have likely hit a ceiling in the inflation of home buyers in the market due to local mortgage lending practices.  Likely the banks have run out of people to lend to and thus the once inflated demand is suddenly deflating.

Then we have the 524 or so ‘affordable’ homes either built or in the process of being built under government initiatives.

This of course is followed by the Bermuda Immigration and Protection Amendment Act of 2007 which discriminated against Bermudians married to non-Bermudians, causing them to be unable to purchase second homes and also requiring them to acquire licenses to purchase homes, delaying and disabling their ability to get the homes they want without hassle.

Then we have the term limits policy, which when combined with the difficulties at immigration and various other factors have made doing business in Bermuda less attractive causing many firms to begin moving back office jobs off island.  Of course, with those jobs goes demand for the rental market as well as capable middle class Bermudians who want to keep their jobs and may well sell their homes as they leave.

Ok, so now the half million dollar question:  are these likely contributing factors to the decline in housing prices and softening of the housing market?  Before you answer such a question, consider this:  What happens if you combine a weakening global economy with off-shoring of local jobs and a rapidly softening local housing market?

A weakening global economy means global spending is getting tighter.  While Bermuda is typically quite shielded by such events is there a guarantee that Bermuda will feel no side effects?  Further, will the off-shoring of local jobs mean a decrease in overall employment levels, subsequently decreasing local spending?  Spending that keeps many supplementary industries afloat?  Finally, what happens if the housing market continues to soften and a large number of mortgage holders (especially those with interest only loans) wake up to realize that the value of their home has dropped and they now are in a state of negative equity if they try to sell?

What happens if any or all of these scenarios are true?  Would that mean rocky roads ahead for Bermudians?  What does it mean for the future of our housing market?