Saturday, October 9, 2010

"Islamic" Property Financing in Syria "This Time It's Different. Really, It Is."


Rasha AlAss over at The National has an interesting article on how the pricing on "Islamic" banks' real estate financing in Syria and Lebanon is much higher than at conventional banks.  While she doesn't give a reason, I'm guessing that it's their much higher cost of funds and not any desire to earn an outsize profit.  The latter of course would run afoul of prescriptions to deal fairly.  Wouldn't it?

A couple of quotes from "wise" local bankers:
Some bankers are pleased with this, pricing their products on the speculative idea that property prices will continue to rise. Explaining why the traditional mortgage rates are so high, one banker says: "Well, real estate in Syria keeps going up. So even with a high interest rate, the appreciation will still be higher." Mr Darkazally echoes this sentiment. "Real estate prices in Syria will never go down," he says.
So does this constitute aggressive lending? And could the speculative behaviour by customers and bankers on a property boom that has not yet gone bust lead down the same road that brought the world to its knees in the recent credit crunch? "Not in our day," says Mr Darkazally .
Normal financial laws apparently don't apply in Syria.  This time it really is different.

Oh, and if you want a real surprise on your "Islamic" real estate loan, buried there in the fine print is a "prepayment penalty" or perhaps something called a profit rate protection clause. 

3 comments:

Vanguard said...

Not all real estate booms are speculative though it does not take speculators long to arrive.

A few questions can clarify that prices are rising to a new equilibrium or is it a bubble.

1. 95% of syrians own home? How come? Is the population of syria stagnant? Or is it that the married offsprings live with their parents? If it is the latter and I am assuming being a poor muslim country, the population growth rate would be higher than 2.1% required to sustain the population. This means that the houses would be congested and there is a lot of latent demand for housing.
2. Are the buyers of these properties first time buyers or secondary buyers? Buying for investment purposes or for flipping? If its the latter, speculative bubble forming.
3. With high cost of housing, its unthinkable for anyone in such places to think of buying home from cash especially when they don't have a culture of credit cards and mortgage loans. Introduction of mortgage financing and associated laws can initially lead to boom in construction as lot of people who could not think of owning ever now can at least realize their dream.
4. What is very important in such cases but never done is in depth studies or even back of the envelope? Is the demand sustainable i.e. are the buyers first time buyers? How much demand is generated by associated industries such as cement, construction, contractors ploughing back their income into creating demand (which is artificial)
5. The advantage of islamic financing in dubai was that your installments are not due unless the house is delivered to you. Hence the only money tied up is your deposit. This caused common and otherwise smart people (very shrewd corporate bankers I knew lost even the kitchen sink to this speculation) to invest into multiple apartments for flipping or later selling on profit. Is the same happening in Syria?
6. Beware of construction industry being the indicator of economic growth and leading employer. If syria suddenly shows that everyone wants to be in real estate from engineers, to financiers, to accountants, the end is near.
7. Lastly, I have seen it in many places before the market (real estate, stock, bond, commodity) crash, if even the taxi driver or your office tea-boy (some of us are priveleged to have one) starts talking about investing in such markets, bring out your tin hats

Vanguard said...

one more, can the borrowers afford the mortgage payments few years down the road assuming that with time their family grows, expenses will grow whereas income might not grow that fast (at least that is what I would take away from the article that the income levels are stagnant)

Abu 'Arqala said...

Vanguard

A good guide.

How about adding to your "rules" when bankers and market commentators tell you that prices can never go down?