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Old 08-01-2013, 10:00 AM
Cool_Guy1 Cool_Guy1 is offline
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Is Papua New Guinea experiencing and asset price bubble?

The sky rocketing real estate prices in Papua New Guinea especially in Port Moresby tend to raise a lot of eyebrows. With the ever increasing rental and sale prices of properties in PNG, real estate moguls have started to borrow heavily from the commercial banks and started to build grand looking properties to cash in on the ever increasing prices, pushing prices even further.

Rental properties at Toaguba hill is around K6000.00/K8000.00 per week, which is over the top. A 3 bedroom property at the same location is going for more than K6 million. What is causing this prices hikes on properties in Port Moresby?

In economics, prices depend on supply and demand conditions in the market. When demand goes up and supply can not match the demand, it pushes prices up. The vice versa can happen, when demand goes up but supply is more than demand, pushing prices down.

The real estate market in PNG does not seem to follow market principles. Even though there is a real estate boom in the country, which would have matched the demand conditions in Port Moresby, prices continue to increase. As a result some new great looking properties that have been built along the ridges of Toaguba hill, can not seem to find the clients to rent the properties, as a result, inside sources tell me that, prices have been pushed down to get the properties rented. With the price hike, more and more people are moving away from the prime properties in Port Moresby, whose rental prices are beyond anyones income. More and more people are shifting to the fringes of Port Moresby, where they can afford the rentals, leaving behind the class houses, which stand forlone at the ridges of Toaguba hill with no tenants.

When price increases are not driven by demand conditions in the market and driven purely by expectations, in financial markets, they term this as a "asset price bubble". A lot of real estate moguls have speculated that the LNG project would create such a high demand for property and the living standards of most PNG people would improve, hence pushed their property prices up with that expectation and has caused a major stir in the property market. Those property moguls have locked themselves into huge mortgages and bought properties and even build properties that have high expectation prices attached to it, however, when this properties dont get tenants to meet debt obligations due to high rentals, they fall into arrears and then the crisis starts to hit. When asset price bubbles burst, it can criple an entire economy, like that of Japan, USA financial crisis recently, the Asian Financial crisis, all led by property price bubbles.

When the bubble burst, people with mortgages on properties, say borrowed, K5 million to buy a property on Toaguba hill, would see their property valued at K700 thousand. The person will own a property that is worth K700 thousand but owe K5 million in mortage to the banks. As a result, the person intentionally defaults and declare themselves bankrupt and the banks are forced to repossess a property which is worth less than their mortgage. When several or more people do that, the bank looses its profitability and a bank wide crisis ensues.

My best guestimate for the property market in Port Moresby is that, it is a asset price bubble, driven by expectations of the LNG project and not driven by real demand, and my fear would be for people who have locked themselves into large mortgages needed to take heed, when the bubble burst, they will be the big loosers. If i had a huge mortgage now, i would start to sell the property and make some money rather than carry over a mortgage that would be worth more than the property value in the near future when the bubble burst.

happy new year and safe investing
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Last edited by Cool_Guy1; 08-01-2013 at 10:07 AM.
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