Sri Lanka: Property Bubble Imminent?

As per the information collected through the Condominium Market Survey conducted by the Central Bank of Sri Lanka, transactions recorded in the primary condominium market remained at low levels during Q2, 2023. The Condominium Property Volume Index which measures the trend in number of new condominium sales, declined marginally by 1.3 per cent on a year-on-year basis. Meanwhile, new condominium prices in the Colombo district prevailed at high levels during the quarter, with a 10.5 per cent year-on-year growth in the Price Index for New Condominiums. Increased construction costs and the taxes imposed on condominiums resulted in the upsurge of condominium prices and lowered the demand in the market. These adverse market conditions continued during Q2, 2023 as well indicating a stagnation in the industry.


In terms of price categories, majority (47%) of the transactions belong to the price category below Rs. 25 Mn, indicating an increase in sales in the lowest price category compared to the previous quarters. Meanwhile, the transactions recorded in higher price categories (above Rs. 50 Mn) have also increased during Q2, 2023 compared to the previous quarter. Further, the highest number of sales during the quarter were recorded from the single condominium projects category in the Colombo district and a decline was observed in the sales in projects located in Gampaha and Kalutara districts compared to Q1, 2023.

1 During Q2, 2023 and 19 condominium property developers participated to the survey.
2 Condominium Property Volume Index is compiled to capture the variations in market activities by way of number of sales transactions reported for the reference period. (Base period: Q3, 2017 = 100).
3 The index was compiled following the hedonic regression based rolling window time dummy method. The base period of the index is 2019=100. The index covers the Colombo district.
4 The proportions were calculated to get an overall understanding about the funding structure of condominium developments by av eraging the percentages of funds received through different funding sources provided by each developer.

Real Estate Asking Price Trends : 2nd Quarter of 2023


The asking prices of lands, houses and condominiums in Colombo district remained stagnant during Q2, 2023 compared to the previous quarters where the asking prices of houses and condominiums remained high on year-on-year basis, while the asking prices of lands remained low on year- on-year basis.


Moreover, the year-on-year percentage increase of asking price indices5 of both houses and condominiums is slowing down. With regard to lands, a decline could be observed in the year-on-year percentage change of asking price index.

https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/statistics/real_estate_market_analysis_2023_q2.pdf

Why Does a Housing Bubble Burst?

A bubble finally bursts when excessive risk-taking becomes pervasive and prices no longer reflect anything close to fundamentals.

In the housing market, this will happen when builders continue to build in response to demand that has started tapering off. In other words, demand decreases while supply increases. The inevitable results are a slowdown in sales and a decline in price appreciation.

That's not the end of the cycle. As sales slow and prices stop rising, the realization of risk reverberates through the market. That realization could be precipitated by a number of things:

- An increase in interest rates puts homeownership out of reach for more buyers and, in some cases, causes financial distress for current homeowners. This often leads to defaults and foreclosures, which eventually add to the supply of homes available.

- A downturn in general economic activity leads to less disposable income, job losses, and fewer job openings, which decreases the demand for housing. A recession is particularly dangerous.

- Demand is exhausted, bringing supply and demand into equilibrium and slowing the rapid pace of home price appreciation.

At that point, the cycle could be completed. Supply and demand have achieved equilibrium and prices have leveled off. But it can get worse.

As the mood of the market changes, credit standards are tightened, demand decreases, supply increases, speculators leave the market, and prices start to fall.