Determining Motives for Demand Growth in Egyptian Real Estate Market
Shafik, Omar Aziz
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Kindleberger C. (1987) defined a bubble as “a sharp rise in price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers—generally speculators interested in profits from trading in the asset rather than its use or earning capacity. The rise is usually followed by a reversal of expectations and a sharp decline in price often resulting in financial crisis. The specific aspects of an economic bubble include: rapidly rising prices, unrealistic expectations of future price increase, vast difference between market and intrinsic value and/or large drop in prices after bubble burst”. Focusing on the housing market in Egypt is warranted for several reasons. Following the devaluation of the Egyptian Pound in 2016, the housing market in Egypt experienced a general increase in USD terms compared to a dramatic increase in EGP terms. According to the Aqarmap Index, demand on real estate has been growing steadily since 2011. Also, Sales and rentals prices of residential apartments have increased by 59% in New Cairo and by 50% in 6th of October (The Egypt Real Estate Market 2017: a Year in review). Furthermore, the number of mortgage finance companies (MFC) operating in Egypt increased from only 2 in 2005 to 13 in 2016. In fact, Egypt was named by Euromonitor International as the world’s fastest growing mortgage market in 2017, due to huge domestic demand. Finally, the contribution of real estate to Egypt’s GDP has increased by 6,023.72% from 2001-2017, as reported by Egypt Ministry of Planning to CEIC. The previous indicators have raised suspicion of many speculators on the future of the real estate market in Egypt, some claiming that this could be signs of an economic bubble in formation. The aim of this study is to test demand in the Egyptian real estate market to understand the driver behind demand either speculative or fundamental, which will be investigated via the stock market and real estate GDP contribution.
Research Problem Unsustainable growth happens when it can’t be maintained at the same rate without causing economic problems. And since the real estate market is growing at an alarming rate, it must be determined its sustainability, to deter from negative spillovers to other economic sectors. Therefore the aim of study is to conclude if real estate demand is driven through anticipation of higher future growth, or the value of industry added. The test through time-series analysis could entail of demand relationships with expectations, and net output, in the real estate sector. Also, the test will reveal the magnitude of impact demand drivers have relative to each other, which helps determining main driver. If the demand on real estate is driven by a speculative motive, and growing through feedback, then the market growth is unsustainable and a bubble could be formulating. An unsustainable market exhibits over-valued prices deviating from fundamental value, which is a symptom of economic bubbles. In most cases, price bubbles derive all of their variability from exogenous fundamentals rather than from extraneous factors (Froot and Obstfeld 1991) However, if demand is driven through fundamental sector growth, and demand growth is matching supply growth, then the market is efficient and sustainable. The previous concerns could be summarized in the following questions. Is the growth of the Egyptian real estate market sustainable? To what extent is real estate demand driven by expectations of future growth? To what extent is real estate demand driven by sector growth?
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