Affordable Housing

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Affordable Housing

Housing, and in particular affordable housing, have been the topics of much discussion of late in the Cayman Islands. I thought I’d take this opportunity to explore housing prices in the Cayman Islands, examine the housing market, salaries, and demographics on a global basis, as well as look at affordable housing in the Cayman Islands.

Residential prices in the Cayman Islands

Residential real estate prices are continuing to rise in the Cayman Islands across all sectors of the market. When you look at year-to-date numbers (January through September) in 2019, the average price for a residential property in the Cayman Islands was $918,400 and in 2020 that rose to $1,050,069, which is a 14.3% increase year-over-year. In 2021, the average price is $1,269,027, which is a 20.9% increase year-over-year.

Cayman is not alone

A study conducted in 2018 revealed that “of 200 cities polled around the globe, 90% were considered unaffordable when applying the widely-used standard of average house prices being more than three-times median income”[i]

According to a June 3rd article in Fortune, global house prices are soaring with the biggest increases in Turkey, New Zealand, Luxembourg, United States, Sweden, Austria, Canada, and the United Kingdom just to name a few. From 2020 to 2021 house prices rose 32% in Turkey, 22% in New Zealand, 13.2% in the US and 10.8% in Canada. In the US, the median existing-home price for all housing types is now $359,900, up 17.8% from July 2020, marking 113 straight months of year-over-year gains.[ii]

Keeping the numbers in perspective

Although Cayman’s year-over-year increase is larger percentage wise compared to many of these countries, we need to remember that our overall transactions are way less than many of these countries. For example, our 2020 residential transactions were 418 wherein the US that number for 2020 was over 708,000 and for Canada was 551,000. All these countries are much higher not only in population but in the number of transactions which can skew these results.

Additionally, when you have more transactions, the number of very high-end residential properties that were sold during this period doesn’t skew the number as much as it will in the Cayman Islands. For example, in both 2020 and 2021 there were several residential transactions over $20 million. One $20 million transaction is the equivalent to almost 20 transactions when considering the average transaction price.

Another contributing factor

Unfortunately, salaries are not increasing at the same level, which creates an even further problem. In fact, for 2021, “developed and developing nations are forecasting average salary increases of 2.5% and 6.2% respectively.”[iii] As real estate prices continue to climb and salaries aren’t increasing at the same level, the affordability gap is becoming wider, and now more than ever affordable housing is taking centre stage not only in the Cayman Islands but on a global scale.

I suspect that salary increases in the Cayman Islands are probably mirroring what’s happening globally but there are several factors that benefit people living in the Cayman Islands with the most important thing being that we don’t pay any income tax unlike almost every other country in the world. We also don’t pay annual property tax once we do own property.

Average age of first-time home buyers

The reality is that on a global basis, the average age of a first-time home buyer is getting older and older. Facing higher property prices and piles of student debt, the median age of a first-time home buyer in the US is around 34, which is the oldest in records dating back to 1981.[iv]

The median age of all buyers in the US also hit a new record, 47, increasing for a third straight year.[v] A nationwide shortage of housing, coupled with lower mortgage rates, has stoked prices in cities from the coasts to the heartland. At the same time, student loans, income taxes and other debts make it harder for Americans to save tens of thousands of dollars for a down payment, while tight lending standards can make getting a bank loan difficult for borrowers with less-than-stellar credit scores.

I would estimate that the first-time Caymanian home buyer is younger than 34 which means Cayman is beating out our brothers to the North. We are getting people into properties at a younger age, which is a good thing.

In 1997, I bought my first house at the age of 27. I spent 5 years saving up for the down payment but even then, I needed help from my family for the closing costs and that was 24 years ago. As like most people, I had to stretch to get into my first home. It took everything I had saved up to make it happen.

The impact of low interest rates

Interest rates have been low for more than 2 years. Lower interest rates have a direct correlation to rising home prices. With lower interest rates, buyers can now afford to buy more than they could have in the past. This creates a more competitive seller’s market with more people who can now afford to buy higher priced homes.

Coupled with that, the developers haven’t been able to keep ahead or predict the market absorption and as such inventory is low. This is a globally phenomenon spurred by the move to “just in time” manufacturing over the last half-century, as discussed in my article on construction materials, in which parts are delivered to factories when needed, which has led to a massive shortage of almost all goods.

Down payment & closing costs

 One of the biggest challenges facing first time home buyers is coming up with the funds needed for the closing costs. First-time Caymanian buyers do not have to pay the 7.5% Stamp Duty fee, but many other people who have called Cayman home for years do. On a $200,000 home, this amounts to $15,000, which is a substantial amount to come up with in addition to the average $40,000 or 20% down on a $200,000 home.

The reality is it takes the average person a long time to save the down payment for a home. In this US, it takes an average of 6 ½ years to save the 20% down payment alone. As of February 2021, in Canada, it takes an average of 5 years the minimum down payment of 6%, which is the longest savings period calculated in around four decades.

I would suspect that it takes less time for the average person in Cayman to save for a down payment given that we pay no income tax which is the US ranges from 10% to 37% in the US and 15% to 33% in Canada.

Affordable housing in Cayman

As outlined in several recent articles in the Cayman Compass, there are affordable housing options in Grand Cayman.

Orchard Ecovillage’s price range of $289,000 for a one-bedroom unit up to $500,000 for a three-bedroom home, fits the definition of affordable set by the UN. A worker on an average annual salary of $40,000 could qualify for a mortgage on the one-bedroom home, provided they have saved 10% for a deposit and closing costs.[vi] Phase one of this development sold out in just 10 weeks and phase two is currently being sold. Construction of phase one is already underway.

Unfortunately, a couple of new developments such as Orchard Ecovillage will not be enough to fulfill the need. Additional affordable housing options will need to become available in the Cayman Islands throughout the years go come. As with many countries, the Cayman Islands government will need to work hand-in-hand with developers to create affordable housing options in Cayman. This will need to be a partnership, much like what is done in the UK, US and Canada, to create new neighbourhoods with a mix of subsidized properties and middle-class homes.

Right now, there are no restrictions on property ownership in the Cayman Islands. Attorney Cline Glidden, of Ogier, suggests the influence of high-net-worth property buyers in Cayman is largely positive and has a relatively small impact on the local market.[vii] With the growth in population and a points system which incentivizes permanent residency applicants to purchase real estate, more people are being encouraged to buy real estate and the reality is we don’t have enough properties in the mid-range to meet the demand.

Some people have asked why we don’t just ban new foreign buyers. Some other Caribbean Islands restrict home ownership to locals only and Canada’s Prime Minister Trudeau as part of his re-election campaign is focused on housing including to “ban new foreign ownership”. But I don’t believe this is the solution.

When you dig deeper into many of these “bans” you will find that they aren’t bans at all and in fact those types of programs would not have the impact in the Cayman market as they would in other countries. In fact, Trudeau’s housing program is temporary. It will ban “foreign money from purchasing non-recreational, residential property in Canada for the next two years, unless this purchase is considered to be for future employment or immigration in the next two years”.

In 2018, New Zealand introduced a ban on foreign buyers purchasing existing homes in New Zealand. Three years later, this ban has not resulted in lower housing prices. In fact, as noted above, New Zealand is seeing record-high prices and a year-over-year increase of 22% as stated above.

So, what is the solution?

I don’t know and I don’t think one person or one idea will solve the housing shortage and affordable housing issue in the Cayman Islands. This is something that almost every country in the world is grabbling with. There are multiple “solutions” but there doesn’t seem to be one thing that truly works effectively. There is not a quick fix to this problem. What it will require is multiple branches of the government and the private sector working together to tackle this issue and implement solutions that is to the benefit of all.

We must remember that the housing market over multiple years, as it has done in the past, will shift. Whatever we do now has to take that into consideration because what works today may not work in the future.

[i] World Economic Forum, June 2019
[ii] Trading Economics
[iii] Willis Towers Watson, January 8, 2021
[iv] Experian, December 2020
[v] Bloomberg, 2019
[vi] Cayman Compass, September 1, 2021
[vii] Cayman Compass, September 7, 2021