So, as we suspected (see here and here) it looks like we were in a housing bubble which is now bursting.  Bermudians borrowed more than they saved, Banks were too desperate for business and government policy weighed in.  While this may be a good thing for some, it is certainly bad for others. 

Let’s recall the always trusted word of realtors (you know, the ones who are paid to sell homes) from July of last year.   Remember “Now’s a great time to buy a home’?

"… 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.”

"Depending on the property and where it's located, you're probably seeing a growth of 5 per cent a year.”
"For the person looking to buy a house it's a good opportunity for them”

Hmm, it a 30% decline doesn’t sound like things have ‘leveled off’ at all.  Hopefully you don’t make a habit of trusting a fox trying to sell you a hen house.

Anyway, as we noted there are a number of factors contributing to the decline.  Bermudians have been borrowing more than they save.  Banks here got loan happy much like they did in the states and rushed to give out loans to people who couldn’t actually afford them by transitioning from moderate down payments to 5% then 0% and finally interest only.  Finally, government introduced policies like term limits, restrictions on Non-Bermudian married to Bermudian home ownership and a raft of affordable housing projects.

So for those of you in the market for a home and not terrified of the prospect of Premier Brown taking your home because he feels ordained to do so, things are looking brighter.  We couldn’t say now is the time to be buying but we’re getting there.  For those already owning homes, things don’t look so good.  Rapidly falling home prices means if you bought your home in the last few years when housing was peaking, you may well now owe more on your home than it is worth.  Worse, with the downturn rental incomes are also beginning to slide which means if you’re relying on renting out part or all of your property to help cover the mortgage, you may now be covering more than you budgeted for.  Negative equity is never a good thing.

Beyond the tragedies of individual Bermudian’s trials with homeownership we can look at the greater implications for the Bermudian economy.  With the economic downturn many people are finding themselves without jobs and not just those at the lower rungs.  Some of those people could have recently bought 0% down payment or worse interest only loans only to find themselves without the income to pay for it.  Suddenly not only do they have to pay interest, they now can’t pay back the money they owe by selling their home.  This doesn’t lead to good things for our economy.

So the question facing us now is where do we go from here?  Quite unfortunately it has been our view that housing prices can and should come down.  It’s a necessity to begin balancing the cost of living in Bermuda.  This blog still holds the view that the root of the housing problem has been a lack of housing geared towards expats.  Homes won’t be ‘affordable’ until Bermudian families no longer need to compete with house sharing expats, though $5000-$8000 a month one bedroom apartments aren’t what we’re talking about.

While we still encourage price declines there is no reason why the decline needs to be drastic.  Thus, we may be looking at a good time to let market forces take over and ratchet back on the ‘affordable' housing projects.  Beyond that restrictions on Bermudian/non-Bermudian family home ownership can be relaxed such that it is easier for these individuals to buy homes.  If we find the rate of decline in the ex-pat population is simply too fast, we can also look to relax immigration restrictions to abate the decline, though as we’ve mentioned before, infrastructure considerations should be taken into account.

So welcome to life after the housing bubble, it’s been quite the wait.  Hopefully we’re seeing Bermudians save a bit more, banks being less greedy and considerations being given to changes in government policy.  While we can’t say this decline is the best thing for everybody it is likely that over the long term Bermuda and its people will benefit.