|Back when we first moved into Road 28, Dhanmondi in 1996, every square feet of new apartment space was valued at Tk 1500. Sixteen years later, the price has gone up to an astounding Tk 20,000 per square feet. For those of you who are not so familiar with real estate terms, let me put this into perspective with a simple example. In 1996, a 2000 square feet apartment in Dhanmondi was priced at Tk 30,00,000 (30 lakh) but now such an apartment cost easily around Tk 4,00,00,000 (4 crore). Price has gone up by 1233% or by over 12 times in the last 16 years.|
No wonder people in Bangladesh think real estate is a heavenly investment. Yes, you may argue that inflation has risen which is likely to be natural causing property prices to go up. But even if we assume inflation was around 10 % annually over the past 16 years, that would have caused the price per square feet to go up in Dhanmondi to around Tk 7000 per square feet and not around Tk 20,000. Well you may argue that demand has been growing fast. In fact, that is the answer almost everyone gave me. If that really is the case, are we seeing a property bubble in Dhaka? If so, should we expect a disastrous burst of that bubble some time soon?
This article will explore the probable reasons of property price rise in Dhaka. It will also try to answer whether the fear of a possible burst or a disastrous tumble in the real estate price is legitimate in the setting of Dhaka, Bangladesh.
Now what are property price bubble and burst? Well, in simple terms, a property price bubble occurs when price of property rises steeply which cannot entirely be explained by change in fundamentals such as rise in cost of construction material, normal growth in demand, rising inflation, etc. A property burst occurs when this rapidly rising price collapses or fall. Such an incident can cause havoc in a nation's economy.
The best, recent example of such a bubble and burst was the one that occurred in the U.S.A that initiated the Great Recession around 2008 which later contaminated the globe. Exceptionally low interest rates, easy mortgage availability, issuing mortgages to people with questionable credit history, etc all caused property demand to soar unnaturally causing property prices across the U.S.A to rise. This was followed by a disastrous fall in property prices around 2006 as people started defaulting on mortgage repayments. The rest is a painful economic crisis written in the pages of recent world history. Could such a thing happen in Bangladesh too? Would rapidly rising property prices eventually tumble, perhaps even causing the economy to go into a painful recession?
First let us try to understand the reasons for the property price hike in Dhaka.
Firstly, there are the obvious reasons of price rises due to price of construction materials such as steel rods, cement, etc rising. Fair enough. But that couldn't have caused the property prices in Dhaka to rise so much.
Then comes the commercialization of previously residential areas. Schools, office spaces, shops, banks, buying houses, etc are sprouting out like mushrooms all over places like Dhanmondi, Gulshan, Banani, Mohammadpur, Eskaton, etc. Obviously, with increasing commercial demand for land inside residential areas, prices of real estate property is on the rise.
Common sense tells us that Dhaka is a very small city in terms of area and this scarcity of space together with growing population may be a good explanation for this rise in property prices. Middle income or upper middle income households can no longer dream of buying plots of lands within the city. Naturally, demand for apartment space is on the rise. Vertical expansion of living space is visible all around us. But that got me thinking in a very different line.
When I look into the price of these apartments, one thing becomes clear. The price is very fast going beyond the range of middle income and upper middle income families. If that is the case, why is property prices still rising faster than ever before? Who is demanding the new expensive apartments?
Black money is playing a instrumental role or so I would like to believe. Demand growth is not one due to rising credit or home loans. People who are buying are paying all in a go or in large installments in a very short period of time. Surely, people, from even upper income families earning in legal ways cannot afford to pay such huge sums of money at a go. That is where undeclared money to the government and wealth accumulated from corruption come in. Property investment is often considered a safe heaven for those not transparently and accurately declaring their wealth accumulation to the government. Mutual agreements between buyers and sellers ensure that reported selling price is much lower in the deed than in reality. Naturally, the tax paid is much much lower than should be the case had the wealth being declared accurately or accumulated in some other form. It is not surprising that occasional articles or feature reports on corrupted government officials, politicians, businessmen, etc show that they each own numerous if not over 10 apartments within the city.
So can we call this rising real estate property prices in Dhaka a bubble in the making? I believe we can. Because, demand arising from accumulation of undeclared income or income from corruption should not be the norm but is on the rise for several years now. Had this high level of corruption and illegal activities not been prevalent in Bangladesh, real estate property prices should have been much lower and within the range of upper middle income families. Even Bangladesh Bank in an article in The Financial Express spoke along the same line (see the link at the end of this article).
Will the property bubble burst or real estate property price collapse? Honestly, I do not know. For one thing, I do not see corruption falling anytime soon. If not anything, practice of corruption and hoarding undeclared income/wealth is on the rise. However, if there is a severe and serious crack down on corruption and such practice of hoarding undeclared wealth or undervaluing real estate property in official documentation, real estate prices may actually decline for a while. On the other hand, Dhaka, with its small space, is buzzing with rising population and growing businesses which may continue to sustain this high real estate property prices across Dhaka if not prop it up by a few folds.
Thus, we, as citizens of Bangladesh, continue to see an interesting and unprecedented case of property bubble in Dhaka. Only time will tell how this bubble acts depending on political environment and corruption together with genuine reasons of property price rise such as scarcity of space, rising cost of construction material, growing population etc.