The Mauritian housing bubble?

The question I am asked most commonly, by both the public and professionals, is whether I believe that there is a rising bubble in the Mauritian real estate market.

Specifically, this relates to a housing bubble, most recently defined by the traumas experienced by Western nations following the 2008 financial crash, and technically defined as “a significant increase in housing values over a prolonged period followed by a sudden and steep decline”.

The reasons behind interest in “the bubble” are mainly derived from a perception, or “just a feeling”, that people have. Why this is such a common question relates to a number of factors: -

•  Love. Mauritian’s have a love affair with property. Land is the rarest resource this island nation has and due to a history of demographical and social trend, it has always been favoured to buy land for both today’s and future generations.  In the 2011 CSO survey, no less than 88.9% of Mauritians were owners of their house. If a person can’t afford to buy land or houses, it is a simple deduction this must be due to overpricing. What is actually happening is that the shortage of land is now driving development at higher density; this is the future in home ownership.

•  Speculation. A feeling of “over development”, driven almost entirely by the number of glossy adverts for speculative green field projects that never see the light of day. Skim through any of the property pages and 90% of the stunning projects planned for development never happen. The construction industry is actually in decline for the fourth year running and we are now building less and less.

•  Asking Price. The majority of the properties advertised for sale are expensive compared to average salaries. Like in most nations, there is actually a housing shortage here with the Ministry of Housing and Land statistics showing a current shortfall of 40,000 residences and a belief that this number will increase by roughly 10,000 residential units per year.

Economics can’t help us identify if we are in a bubble as it is a science that forecasts by looking at the past; it is like driving a car using only your rear view mirror! That being said, some economists can be extremely accurate and it’s often noted they, in fact, anticipated 5 of the last 3 recessions!

The real drivers of all housing bubbles are high demand, low supply and the availability of large amounts of cheap debt; people don’t buy more and more expensive houses with more and more personal equity – they use what little equity they have and leverage it through bank debt by way of mortgages. At its peak in the UK, the banks were lending people 125 percent of the price of a property – with no need for any cash down. Transactions cannot occur at high values if the participants in the dance cannot finance the requested cost.

The Bank of Mauritius is highly conscious of the wide-ranging effects of a crash in housing prices on consumer confidence and the economy at large. This is why it has put in place, in 2013, mortgage level restrictions to stifle any chance for the injection of more and more cheap debt.

The restrictions set up by the Government for foreign ownership also assist in restraining “the bubble” in domestic prices. In the IRS market, the actual average sales prices achieved first stalled, before declining as international buyers in 2009 and 2010 experienced the same financial constraints in terms of raising debt. The current crop of IRS residences is designed for this new market and bears little resemblance to the massively expensive villas available prior to the global downturn. The press has an incredible fascination with IRS which is weirdly disproportionate when you consider that IRS and RES residences constitute less than 0.2% of all the households in Mauritius. 

In summary, the impact of a housing bubble bursting is dreadful, but the chances that we are currently sitting inside one are minimal.  However, the question that we should ask ourselves is whether the country is building enough homes at the prices people can afford to pay.

By Murray Adair, CEO of BlueLife