Maldives towards a Housing Bubble?
Maldives and Its Housing Problem
The Maldives is a small island nation with 26 atolls spanning approximately 298 kilometres in the Indian Ocean and is mostly known for its tropical beauty. The population of the Maldives is estimated to be above 427,700 inhabitants, of which 40% live in the capital island Malé. With a high population density of over 1102 people per square kilometre, the Maldives is the 11th most densely populated country on earth.
In 2014 Hulhumalé was inaugurated, and as of 2019, it has reached a population of over 50,000 inhabitants. Moreover, in 2015 the Government reclaimed an additional 244 hectares abutting on Hulhumalé which is estimated to provide housing for a population of further 160,000 inhabitants.
What is a Housing Bubble?
A housing bubble, or real estate bubble, is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse.
It consists of two phases; first, there is a period where house prices increase dramatically, driven more and more by speculation. In the second phase, due to decreased demand house prices fall rapidly, causing the bubble to burst. Excess of supply or a rise in interest rate will result in a fall in demand. For instance, if the availability of housing units increases, landlords have to reduce the price if they wish to rent because people would have more options on where to stay.
Housing Bubbles tend to have a tremendously adverse effect on the economy because they are credit-fueled, as apart from investors, a large number of households participate too. Hence the wealth effect from housing is more consequential to the real economy.
How is this applicable to the Maldives?
Either for better medical and educational opportunities or just to get hired, people have been domestically migrating to Malé City for over the past two decades resulting in congestion, higher rent, and the value of land in Malé City to rise significantly higher compared to the rest of the Maldives.
Over the past half a decade, remarkable investments by both the private developers and public enterprises have augmented interest in the housing market. Due to its high demand and scarcity, businesses saw an opportunity for a promising investment in the housing industry. Note that most of, if not all, these projects are credit-funded. And a lot of Malé landowners have been building their homes with mortgage-backed loans.
All the presidencies of the Maldives so far had one efficient solution to this issue: build more housing units in the Malé area.
Apart from apartment complexes built by state-owned enterprises, several private developers are expected to build towers in few years ahead. It has been planned to build 20,000 housing units in addition to the already constructed flats. After the completion of these projects, presumably, Hulhumalé will provide shelter for over 240,000 people (over 50% of the total population of the Maldives).
In 2018, to encourage the construction of more housing units and provide accessibility to housing financing, amendments were made to the Affordable Housing Loan Scheme Regulation. This stipulated banks and other financial institutions to grant credit facilities without additional equity or down payment from the applicant other than mortgage over the property being bought or constructed from it. In simple words: banks were somewhat bound to grant riskier loans, and failing to repay these loans will cost borrowers the very property they had spent it building.
Reports from the central bank of the Maldives (MMA — Maldives Monetary Authority) shows that a prominent amount of loans were lent to support the real estate industry over the past years. During the past months, while credit to the construction sector rose by 13% imports of construction materials had been decreased by 19%, indicating that the supply of construction-related projects in Malé region is reaching a limit.
“It is noteworthy that this is the first time the construction sector growth has declined since Q3–2013.” — Quarterly Economic Bulletin June 2019 | MMA
Let us ponder over:
Imagine the number of people from Malé that will be moving into the new apartments built by the Government and private enterprises. And when they do, the impact will be somewhat catastrophic; in the short-run at least.
- Landowners: Will middle-class landowners without any other source of income (other than rent) have trouble renting their rooms?
- Developers: Can they sell off the expensive apartments they built as anticipated? Poor and middle-class Maldivians comprise over 80% of the population.
- Banks: Housing loan repayments getting delayed will be more probable, making it more difficult to recover. And, suppose the banks were compelled to sell off the mortgages, to compensate a large number of these overdue loans would they be able to make the most favourable deal out of it?
In summary; to meet the rising demand for housing in Malé City private enterprises and landowners built towers of apartments, with credit facilities provided from the banks. However, as sufficient housing units are being developed in the region now, the demand will significantly decline as people start to move into these new apartments.