The Tribune

• Urges banks to cut all home buyer down payments to 5%

• Warns ‘something special’ needed to revive housing market

• Can talk booming tourism ‘until crows come to roost’ if not felt

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A two-time Bahamas Real Estate Association (BREA) chief is urging banks to cut the down payment demanded from all home buyers to 5 percent, as he warned: “The middle class aren’t feeling this prosperity.”

Patrick Strachan, while hailing the Central Bank’s decision to eliminate the need for borrowers to take out mortgage indemnity insurance to qualify for a lower equity contribution, told Tribune Business that “something special needs to happen” if The Bahamas is to truly revive the middle class housing market and make it a key economic growth driver once again.

Asserting that much more is required, and that The Bahamas must be “creative and aggressive to get the middle class moving again”, he added that the banking industry’s demand for clients to finance up to 30 percent of a property’s purchase from their own pocket was increasingly placing home ownership beyond the reach of many persons.

Mr Strachan, pointing out that a 15 percent down payment on a $300,000 home would require the purchaser to come up with $45,000 themselves, told this newspaper that around 65-70 percent of prospective buyers in the middle class market segment he operates in are typically unable to afford this or qualify for mortgage financing.

With growing numbers effectively being excluded from home ownership, the former BREA president argued that despite all the talk surrounding record tourist arrivals numbers “there is no trickle down” and the impact is not sufficiently impacting enough Bahamians “in their pocket” and standard of living.

And, suggesting that the Davis administration will “have its work cut out in 2024,” Mr Strachan said too many Bahamians will still “feel the pressure” from the high food and energy prices that have raised the cost of living as he warned: “Until the middle class feels it, you ask yourself how good it really is.”

While branding the Central Bank’s mortgage indemnity insurance relaxation as “a positive move” and a step “in the right direction”, he nevertheless added: “I also believe something special needs to happen for the middle class market to get moving again.

“I believe the [home buyer] down payment requirement ought to be relaxed to 5 percent to get the middle class moving again. I think the down payment needs to go to 5 percent. I think 15 percent will be a challenge for a lot of people; even coming up with 10 percent.

“The economy may be in good shape for some people, but the middle class is feeling a lot of pressure. There is no trickle down that I’ve come across. We are bragging about 8-9m tourists, but how many of them are coming on cruise ships?” Mr Strachan asked.

“The middle class man and woman are not feeling all this prosperity being pronounced. Until they feel it..... I recommend that banks finance mortgages at 5 percent down. In the US, you can get a mortgage with zero percent.

“We need to do something special, creative and aggressive to get the middle class moving again.... We can talk until the crows come back to roost about how good the economy is doing. Until the middle class is feeling it you ask yourself how good it’s really doing.”

Bahamian commercial banks, credit unions and other mortgage lenders will almost certainly not apply a 5 percent down payment requirement across-the-board, although so-called ‘blue chip’ borrowers may be able to qualify for such a minimal equity contribution if they are perceived as being low default risks.

The Central Bank’s easing of the mortgage indemnity insurance requirement reiterated that its bank licensees have the ability to set down payment and other requirements on a case-by-case basis, based on their assessment of each borrower’s risk, but warned that they should not breach the 50 percent debt-to-income ratio.

Mr Strachan’s comments are likely to resonate given that middle class and lower income Bahamians have increasingly been squeezed in the 15 years following the 2008-2009 financial crisis by relatively stagnant incomes and earnings that have failed to keep pace with an ever-rising cost of living fuelled by food and energy inflation, other commodity and expense hikes, and tax and fee increases.

Chester Cooper, deputy prime minister and minister of tourism, investment and aviation, recently predicted that The Bahamas will have attracted “well in excess of nine million visitors” during 2023, but the impact of their $6bn collective spending - and where this has been felt - has yet to be broken down amid concerns that this has yet to sufficiently touch all participants in the economy.

Pointing to the obstacles that many Bahamians face in qualifying for mortgage financing, Mr Strachan said: “I’ve spoken to loan officers. I have taken prospects to see properties and, in some cases, banks have asked for 30 percent down. Where in the world are people going to come up with 30 percent down for a $250,000 or $300,000 property?

“I would encourage the banks to go as little as 5 percent down. At 5 percent down, that will enable more persons to qualify and pursue their dreams of owning their own home. The market I work in, I would say 65-70 percent of buyers are unable to qualify.

“Imagine that you want to purchase a home for $300,000. The bank is telling you you have to come up with 15 percent. That’s $45,000 plus an additional 8-10 percent in closing costs. That’s an additional $24,000 to $30,000 in closing fees.”

Besides the down payment, the other closing costs include attorney fees, which are typically set at 2.5 percent of the purchase price. Then there is the real estate broker’s 6 percent commission, which is sometimes split equally between buyer and vendor, and the 10 percent VAT on the sale which is also frequently shared 50/50.

When all added together, at best this will see the purchaser of a $300,000 home having to come up with another 10.5 percent or $31,500 in closing costs which, when added to a 15 down payment, totals $76,500 unless they are able to qualify for the first-time buyers’ exemption and therefore do not have to pay VAT.

These costs, when combined with the low savings, job insecurity and high level of consumer loan indebtedness that many Bahamians have, create formidable barriers to home ownership affordability. Matt Sweeting, fellow realtor and chief executive at 1oak Bahamas, told Tribune Business he estimates around a quarter of the residential property deals he lines up fail to buyer struggles with financing.

“I’d say 25 percent of deals fall through due to financing,” he said. “What quite often happens is that you get pre-approved by the bank, and based on the information provided it says things are looking good but, when you get down to the nitty gritty - providing title search requests, research reports and other requirements for the mortgage, we’re seeing quite a number of deals fall through.

“The percentage is even higher for self-employed persons with the additional requirement of having to provide three years’ worth of audited financial statements. It’s 40 percent for self-employed, 25 percent for the employed.”

Mr Strachan said even professional Bahamians are feeling the pinch. “I was talking to an accountant, and he and his wife are having challenges even though they have two decent salaries,” he told Tribune Business.

“The high-end real estate market is doing very well. These are folks with cash on hand or don’t have challenges with financing. When it comes to the middle class market that keeps the economy going, that’s where the challenge comes in.

“The middle class is going to continue to feel the pressure of inflation, high food prices and the cost of gasoline, and hundreds of people will be unable to afford their own home because of high closing fees and high down payments,” the ex-BREA president continued.

“I don’t foresee anything on the horizon changing for the middle class market. It’s just a fact. I don’t see anything new. I see a lot of announced developments, but how long is it going to take to put blocks in the ground? How long is it going to take for the money to trickle down?

“Are people feeling the activity in the economy and money in their pocket? It was a challenge in 2023, and it will be a challenge in 2024. I see the Government having it’s work cut out for them in 2024. It’s going to be a challenge for them and we’ll see what happens. Having said that, I’m optimistic. If we keep our shoulder to the wheel and keep pushing forward, positive things will happen for the good of all of us.”