My last commentary “The Real State of Real Estate in Grenada,” included the following key observations:
- US$50 million annually in Real Estate sales is a very, very small fraction of the approximately US$1 billion of listings for sale. The backlog is getting worse, not better.
- The profile of what is selling differs vastly from what is offered for sale, eg the average sale is US$86,905 versus an average listing of some US$544,210.
- The real estate market in Grenada is in crisis! The problems are structural and, without multi-dimensional interventions, they will continue to get worse.
The following examination of Grenadians’ ability to participate in the real estate market will go a long way to explaining why current sales levels are so low and centred on the very bottom end of the available Listings.
What you can buy is determined by a combination of a Mortgage Loan added to your personal resources, viz savings, liquidated equity from prior real estate and/or other investments, gifts, etc. The mortgage portion hinges directly on your (regular/reliable) monthly income and your existing debt servicing obligations.
To explore what is generally available in Grenada via mortgage financing, I used an online “Mortgage Calculator” provided by one of the major local banks to produce a table of the vital values applicable to a range of incomes. This is illustrated below:
|Typical Situation (Expenses assumed to be 15% of Gross Monthly Income.)|
|Monthly Income $EC||2,500||5,000||7,500||10,000||12,500||15,000||20,000|
|Expenses = 15% (Note)||375||750||1,125||1,500||1,875||2,250||3,000|
|Max. Mortgage Amount||85,260||170,500||255,775||341,000||426,300||511,500||682,000|
|Min. Down / Equity (25%)||28,420||56,833||85,258||113,667||142,100||170,500||227,333|
|Max. Purchase Price $EC||113,680||227,333||341,033||454,667||568,400||682,000||909,333|
|Max. Purchase Price $US||42,292||84,573||126,873||169,147||211,458||253,720||338,294|
|Note: Expenses = Monthly Property Tax + Borrowing Payments (eg, credit cards & loans)|
Unfortunately, I have no information (nor can I find any) on what gross monthly incomes Grenadians earn, except a general sense that there are likely relatively few above the EC$5,000/month level. Notwithstanding, let’s use this level to explore what opportunities that someone earning EC$5,000/month can purchase with the maximum amount available through a mortgage, plus sufficient personal resources to meet the minimum 25% down payment/equity investment required by this particular bank. (Note. 1 dollar in every 4 dollars of the purchase price must come from personal resources!)
Let’s use the results to shop the18 April 2017, online listings of Century 21 for the category “All Properties for Sale,”a distribution of which is summarised in the Table below:
|Century 21 – “All Properties for Sale”|
|Listing Prices US$000’s|
A borrower earning EC$5,000/month armed with the maximum mortgage of EC$170,500 plus a minimum of EC$56,833 personal liquid resources can ‘shop’ up to US$84,573. Unfortunately, this does not get them much choice. To be more precise, they would have 2 choices – a 900 square foot, 2-bedroom home in Concord listed at US$70,000 and a 1,350 square foot, 3-bedroom home in La Chausser listed at US$74,627. To buy the next (3rd) least expensive listing, they would need another EC$21,500 in own resources to add to the EC$56,833 minimum already required to get the maximum mortgage amount.
For those with an EC$10,000/month income and a minimum of EC$113,667 personal liquid resources, the choice goes up to 18 properties, and to 62 with EC$20,000/month and a minimum of EC$227,333 in personal liquid resources. (Note: The 204 listings total US$155,490,000 with an average listing of US$762,000/EC$2,050,000 and a Median listing of US$560,000/EC$1,505,000 – ie half are listed above the Median and half below.)
It is noteworthy that a 7.99% mortgage interest rate is extremely high and a minimum 25% down payment very conservative – at least by North American standards. So much so, I felt compelled to confirm directly with the bank that these accurately reflect current requirements. A very conservative down payment level may, however, be defensible in view of the current state of the Grenada real estate market, where very little is being sold. Many lenders are apparently ‘licking their wounds’ as the C21 Report for 2016 highlights that ‘lenders continued to have a considerable inventory of non-performing loans’ and that ‘foreclosures’ made up 14.6% of sales, or 1 in every 7 sales. On the other hand, a 7.99% Interest Rate with a cost of funds around 1% is not at all so defensible!
To be sure, the very stringent local mortgage requirements have a major negative impact on affordability for Grenadians. Should these be equivalent to Canada – where currently the rate on a 3-year term/30-year amortization fixed rate mortgage is 2.54% and down payments are as low as 5%, our example of a Grenadian making EC$5,000 per month could receive a maximum mortgage of EC$317,000 (vs EC$170,500) for a monthly payment of EC$1,293 (vs $2,000). In addition, they would only need personal resources of EC$16,800 (vs $56,833) to qualify for a mortgage that is EC$146,500 (+86%) greater.
In sum, Grenadians seeking a mortgage, unfortunately face a ‘triple whammy’ – a low mortgage amount with a high monthly payment and the need for an unusually large amount of equity from personal resources. In healthy real estate markets, the source of most of such equity would most often come from selling 1 property to buy another, or ‘trading up.’ With such a low level of activity, how is that possible in Grenada?
Faced with a current inventory of possibly around 2,000+ properties listed for some US$1,043,000,000 – mostly at prices way beyond the capacity of the vast majority of ‘locals’ dependent on mortgage financing, ‘locals’ will clearly never provide anywhere near the number of participants needed to achieve any sense of a ‘healthy’ real estate market. Who are the large numbers of additional folks needed, and where will they come from?
Stay tuned for my next commentary, coming soon! Comments? http://[email protected]
The Grand Poobah