Downward slide

On Sunday the press published an interview with opposition leader Mia Mottley on the state of the economy. Included was much criticism of the current policies, but no concrete suggestions as to how Barbados can overcome the problems of an international recession caused by the credit crisis of 2008.

A miniscule economy like Barbados cannot generate growth internally when our foreign exchange earners are all subject to the contraction in the global economy. Even a dominant economic power like the United States is finding it difficult to do so.

The reduced revenue in various sectors of our economy is a direct result of reduced spending power in our major markets, especially the problems in the Eurozone and the austerity programme in Britain which has reduced Tourism revenue.

Barbados is an expensive destination both for visitors and those seeking to invest in business in the island. This prohibitive cost affects both revenue and foreign investment.

The two major contributors to this high cost are the price of oil and land.

Most people are aware of the effect of increased oil prices on inflation, through energy and transportation costs as well as higher household costs which in turn lead to demands for increased labour costs. In the short-term we can do nothing about this. This administration is trying to compensate for the lack of fore-sight shown by previous leaders with new initiatives on green energy, but it will take many years before benefits are realised.

The damage caused by inflated property prices is less well understood. Our economy today is suffering a backlash from the development and policy decisions made by the previous administration which were intended to take advantage of the international real estate bubble which resulted from the ridiculously low interest rate regime in the United States and Europe.

Many Barbadians are today dealing with the residual effects of those policies which were at the time masked by the illusion of growth created by the bubble. The high cost of land is a serious concern and is also a major contributor to the inflation which is making life intolerable for many who have had no comparable income increase and is even worse for those who have accepted reductions in wages or been made redundant.

Now that there has been a change in leadership in the Barbados Labour Party, many Barbadians who were hurt by the policies of the previous administration are hoping for an acknowledgement by Mottley that a return to those policies is not an answer and that a change of direction is called for if there is to be sustainable development which benefits the majority of Barbadians and does not simply exacerbate the gulf between the few with connections to the Real Estate sector and those who suffered from the inflationary effects of their land policy.

Inflated property prices, which are out of proportion to growth and to other sectors of the economy can throw the economy out of balance, creating a drag upwards or downwards, affecting stability and sustainability of the overall economy. The real economy is disadvantaged in many ways. We are now on the downward slide of the roller-coaster created by the former Prime Minister’s policies.

There are several aspects to this issue which I would like to discuss:

1. How increased land prices cause general inflation

2. Land prices and Return on Investment- inflated expectations.

3. Disastrous inflation then contraction in the construction sector when bubble burst.

4. The Illusory Effect of the Bubble.

5. Why land prices remain so high.

High land prices cause inflation

As land prices began to rise in the late 1990’s Barbadians were glad for the opportunity after the recession to realise some gains on their investments.

However as prices rose faster and faster and affected more land sales this meant more people were servicing higher mortgage payments, both personally and in business. This put pressure on those persons to increase salaries and the prices of goods and services to recoup the increased expense.

Rents, both residential and commercial, were also increased to cover increased mortgage payments. Owners of older properties, seeing rents going up were then encouraged to increase their rents as well, leading to a general spiral in rents across the island.

Increased construction activity resulting from the various land developments also pushed up construction costs. Costs of construction materials rose phenomenally as increased demand for cement and blocks resulted in shortages, which allowed suppliers to sell to the highest bidder and increase profits, until supply could catch up.

The introduction into the property market, after changes in the property tax framework, of demand from an expatriate group with disposable income many tens, if not hundreds, of times more than Barbadians enabled enormous increases in material and labour costs in construction, as well as the cost of land and completely distorted costs in the housing sector.

The increased costs in construction resulted eventually in very high repair and maintenance costs to businesses and householders, who were forced to increase prices of their goods and services in turn.

Increased costs in construction pushed up property development costs, mortgages and rents in an ever increasing upward spiral.

When complaining about high prices for goods in Barbados, no consideration is given to the very high cost of housing both the labour and the goods being sold.

Increased costs for residential rents, mortgages and housing repairs and maintenance put upward pressure on wages demands, as housing costs are the major input cost into the cost of labour. Increasing costs for commercial rents, mortgages, and repair and maintenance of the business premises add more pressure for them to increase prices if they are to stay in business.

The increasingly high cost of property development which greatly benefited a small group of land developers and those contractors associated with their developments, created an inflationary pressure throughout Barbadian society, which contributed to our reputation as a high cost destination and made life difficult for many not connected to that sector.

Many are still struggling to pay those inflated rents and mortgages with reduced incomes and this is contributing to some business failures and putting even more people out of work.

Land prices and Return on Investment-inflated income expectations

In addition to increases in rents, mortgages and construction costs, as prices rose the Land Tax Department re-valued properties and raised land taxes.

Businessmen, faced with increasing costs, now fuelled by the rising energy prices, considered their return on investment in light of these revised valuations (remember land tax valuations are supposed to be conservative) and concluded that their operations were not producing a reasonable return. They therefore tried to squeeze more profits from the business, by increasing prices, or by cutting labour costs, or concluded that they could make more money by either renting the premises at an exorbitant rent, or by selling it and re-investing in a more profitable enterprise.

This either further contributed to inflation, or to increasing redundancies, not because they were unprofitable businesses, but because the owners bought into the illusion of the real estate bubble and the unreasonably high income expectations generated by their association with a group with enormously higher disposable incomes.

The huge disposable incomes of the expatriate communities on the West Coast has also affected the cost of professional services on the island by fuelling unreasonable income expectations. The fees of lawyers, doctors, dentists, architects, the many types of engineers and other contractors, such as security service technicians, plumbers and electricians have increased out of all proportion to the salaries and wages of ordinary Barbadians in the last ten years. This has created further suffering for many who have not received a raise, have suffered a reduction in salary, or been laid off.

Many others who could not afford it have jumped into the real estate market or have been tempted by the illusion created by the real estate bubble and overextended themselves. Many businesses have suffered this fate, most notably CLICO.

Those so-called economists and politicians who tout their superior abilities, but failed to warn of this fate and instead benefited from the illusion of growth during the bubble, have much to answer for.

Disastrous inflation then contraction in the construction sector when the bubble burst

This distorted view of growth opportunities has created havoc in the construction sector, where a growing number of builders and building and hardware suppliers jumped into the market to supply the over inflated construction sector and now are suffering badly as the recession weeds them out.

The enormous contraction in the construction industry resulted in many business failures and large job losses, placing many families in economic difficulties, especially given the exorbitantly high housing costs to keep a roof over their heads. A double whammy many will never recover from.

The importation of foreign labour to service the inflated construction sector and the expectations raised among our Caribbean neighbours as to Barbados capacity to employ their citizens has created more problems as many are laid off and having no family support structure to fall back on, turn to crime to survive. This further negatively affects our Tourism revenue.

The Illusory Effect of the Bubble

Recent trips along the upper ridges of the West Coast have made me aware of the enormous amount of building and development which have taken place since I moved to the South Coast in 2001.

Areas of cane fields have sprouted huge industrial complexes inhabited by businesses designed to cater to the wealthy expatriate clientele of the West Coast. The prices charged by these establishments are not in any way related to the salaries and wages of ordinary Barbadians.

Row on row of large apparently expensive homes at second glance reveal several entrances and repetition of features indicative of identical apartments on each lot. Barbadians can no longer afford a family home where their children can ride bicycles and play on the grass with the pets. All is concrete, car parks and gated entrances for the convenience of the tenants. Multi-family homes are required to pay the huge mortgages.

Mass tourism development in the sixties and seventies allowed many Barbadians to own their small bungalows and for their children to become educated and move up economically and socially.

The type of development which took place in the last ten years harks back to the fifties, the exclusive West Coast properties, high-end hotels and facilities which benefit only a small group. It has distorted development in the island, inflating property costs, mortgages and rents, contributing to huge inflation in general prices and expectations; inflating, then collapsing the construction sector; and widened the gulf between the ordinary Barbadian and those with access to the wealth of the expatriates who occupy those developments.

This type of development has not contributed to general welfare of the island and the current recession has exposed the flaws in the model and made life much harder for a majority of Barbadians who work for salaries and wages and therefore are unable to increase their own income comparably to the increases in goods and fees charged by businessmen, professionals and independent contractors.

Why property prices remain so high!

Just before the Lehmans collapse in September 2008, a BBC special covered the Real Estate market in Spain and predicted the collapse which has resulted in unemployment levels above 25 per cent and youth unemployment of 50 per cent.

The similarity to our Barbadian situation struck me immediately.

They explained the convergence of interests between the politicians, the land developers, the real estate businesses and the banking sector, which was creating new mortgage products to enable retired British people (like Barbados, their major market) to purchase ever more expensive condominium properties in sunny Spain.

As demand and marketing of holiday homes for the British, who had benefited from New Labour’s economic miracle, increased, prices also were increasing. To make them more affordable the banks were increasing the term of the mortgages, to reduce the monthly payments. They were proposing to offer fifty year mortgages and so that older persons could participate they proposed a mortgage that could be inherited with the property. This allowed the developers to increase the total price of the property to more buyers, who could now afford the lower monthly payments.

The BBC special explained the incentive for the banks to make higher mortgages more available.

This increased the number of potential buyers (the demand), the price the developer received, the interest the bank received over the longer term, made development more attractive so more land owners and construction businesses got involved and everybody along the line of supply benefited, including the politicians who took credit for a booming economy and higher tax revenues. The only looser was the buyer, who did not realise they had been suckered into paying exorbitantly high, inflated prices for their holiday home. Until the financial crash happened!

Unlike the fifties and sixties; when individuals bought land, went to an independent bank for a mortgage, hired a separate construction company to build the house, then shopped for the fittings and appliances as they could afford, all from separate unconnected individuals; purchasing a house is now like instant coffee, you are offered an all inclusive price for a package designed by a developer and pre-financed by the banker.

The developer sources a large parcel of land, approaches a bank to finance the development, contracts with the various contractors to install roads, utilities, erect the buildings, supply the furnishings and appliances and a real estate firm to sell the properties. The bank also agrees to pre-approve mortgages for buyers to purchase the properties at the price set by the developer.

In viewing the BBC special it became clear to me that every player along the line has a vested interest in obtaining higher prices from the buyer. The original land owner, the developer, the contractors, the real estate firm, and the bank all stand to increase profits as the cost of the property rises.

In Barbados today land owners, contractors and real estate firms are all involved in developments of their own, making the transactions even more incestuous.

That same week the BBC special aired I was researching on the internet an offshore bank which had advertised a job vacancy. I was struck by the downloaded pictures of the ribbon cutting at their new offices.

Around the same time, my English friend who was staying with me, brought home from an elite sports event a publication featuring various sports and financed by a series of real estate ads obviously targeted at expatriates. In light of the BBC revelations regarding the convergence of financial interests in the Spanish Real Estate market, I again found the photographs very interesting.

I, along with many other Barbadians, would be interested to hear Mottley’s views on future development strategies for Barbados and how these would impact various economic sectors and different economic and social classes.

The financial crash of 2008 exposed the fallacies in the Free Market, low interest Anglo-Saxon economic model followed by the developed world since the 1990’s. There are many debates around the world to find a new and fairer model, which would not continue to widen the gulf between workers (who work for set wages) and those who are able to determine their own income levels by setting prices and fees.

We cannot return to a model which depends on bubbles and inflated booms to benefit the speculators and make the politicians look good.

Barbadians need to hear from future leaders how they intend to take this country forward in concrete terms and not simply rhetoric.

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