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Jan 08, 2013

Bermuda's housing market mixed; but luxury house and condominium sales up


It is a mixed picture.  Bermuda luxury home sales are climbing, and condominium sales were up in 2012, comprising 19% of total properties sold as of October 2012, due to lower prices.  This has pushed condominium inventories down from around more than 60% of the market in 2008, to around 40% in 2012.

But overall, sales of homes in Bermuda will likely be 75% down in 2012 on five years ago, according to Coldwell Banker Bermuda Realty. Condominium prices continue to decline, and rents too continue to decline, except for the most expensive houses, and for the rent-controlled sector. And the economy remains sluggish.

Properties below $1 million are the most popular. Around 74% of the sales (as of August 2012) were in this category; 45% of which were under $750,000.

  • The average price of condominiums was around $653,000 as of September 2012, down by 29% from 2011, according to Rego Sotheby’s International Realty President Buddy Rego, writing in his latest market update;
  • Stand-alone residential homes maintained a “remarkably stable” average selling price for the past 4 years. However, the median price fell by almost 10% to $930,000 in 2011, from last year’s median price of $1,025,000.

The average residential price in Bermuda rose 40% between 2003 and 2007, from US$976,000, to around US$1.6 million. However, the rise halted in the aftermath of the global financial meltdown in 2007. Single family homes, which were priced at around $1.6 million in 2007, fell by 16.9% to $1.3 million in 2009.

Weak economic growth

Bermuda GDP growth

Since World War II, Bermuda has enjoyed strong growth. The country has one of the highest GDP per capita incomes in the world, at around $85,996 in 2011. Financial services and tourism propelled growth over the past decade, and are still the biggest contributors to GDP.  Real estate and renting accounted for 17.4% of GDP in 2011.

In 2008, Bermuda’s GDP growth slowed to 0.8%, and contracted by 5.1% in 2009.  Real GDP again dipped by 2.2% in 2010 and 2.8% in 2011. Construction (-23.2%), manufacturing (-12.8%), and international business (-8.3%) sectors felt the strongest impact of the recession, according to Department of Statistics data.

One Bermuda Alliance (OBA) won the general elections in December 17, 2012.  Realtors hope this will slow the decline of house prices, and increase business activity.

Declining rental demand

Bermuda inflation rate

Between 2007 and 2010, there was an average of around 20% to 25% drop in rental prices, according to Rego Sotheby’s International Realty’s July 2011 report, cause by decreasing demand, rather than the supply of more homes.

“The demand for larger homes has decreased as the volume of new executive tenants have decreased.  In addition, the upper three bedroom executive level (i.e. $12,000 and upwards) has had an influx of supply as families have chosen to return home at the end of the school year,” the report states.

Average rents increased by around 40% from 2000 to 2007. An executive home that used to have a monthly rent of US$4,000 in 2004, rented for between US$8,000 to US$20,000 per month in 2008.  But since then, rents in the non-rent controlled sector have declined.

Bermuda tourist arrivals

In 2011, rentals up to $5,000 per month fell by 18.72%, while rentals from $5,000 to $18,000 per month dropped by 16.95%. In contrast, executive rentals ($10,000 to $ 18,000 per month range) continued strong, with the $10,000 to $12,000 per month bracket having the greatest demand, according to Rego Sotheby’s.

Bermuda’s Consumer Price Index indicates that rents have risen every year since 2006. But this is due to rising rents of rent-controlled apartments.  Rent for housing is the largest weight in Bermuda’s CPI, at around 32.5% of the index. According to the Rent Commission, 54% out of the 31,700 rented properties in Bermuda are rent controlled.

Rental yields for houses range from 4% to 4.8%. Yields for condominiums range from 3.9% and 6.4%, according to Global Property Guide research.

Luxury property sales are recovering

Bermuda luxury property sale

Sales of luxury properties declined sharply by 61% from 2008 to 2009, with a $28 million annual sales value. The trend continued in 2010 but at a slower pace, with sales falling by 29%, to $20 million.  But luxury home sales grew significantly in 2011. Sales of standalone luxury homes with annual rental values (ARV) exceeding $153,000 rose strongly during the first two quarters in 2011, with approximately $35 million sold in that period, surpassing annual sales in 2009 and 2010, according to Coldwell Banker Bermuda Realty.

“Luxury home sales in Bermuda, as predicted, closed significantly higher compared to the years 2009/2010,“ says Coldwell president Brian E. Madeiros.

Madeiros pointed that in 2011 the market in Manhattan and Boston for properties over $1 million had heated up, with half a dozen sales over $10 million in the Boston area. “This is all good news for our luxury home market here in Bermuda as a significant number of our overseas buyers live in these east coast gateway cities, and are clearly comfortable buying large luxury homes.”

Mortgage market and interest rates

Bermuda interest rates

Variable mortgage rates in Bermuda can be obtained with terms ranging from 5 up to a maximum of 30 years, and interest rates on long-term loans range from 6.50% to 6.75%, excluding other fees. The Loan to Value Ratio (LVR) is typically 80% (up to 95% at HSBC Bermuda) of the appraised value of the property.

Bermuda does not have a Central Bank. Adjustable-rate mortgages (ARM) are tied to the Bermuda base rate, which usually follows US Fed key rates, as the Bermuda dollar (BMD) is pegged to the US dollar at BMD1 = USD1.

Policy changes on foreign and expatriate home ownership

In June 2012, there were some policy changes relating to foreign buyers, with new threshold requirements covering sales of properties by Bermudians to non-Bermudians and Permanent Resident Certificate holders (PRCs):

  • The minimum  house annual rental value (ARV) was raised from $153,000 to $177,000, but the ARV threshold for condominiums remain at $32,400.
  • PRCs can now purchase homes with a minimum ARV of $63,600.

Foreign spouses of Bermudian nationals are also no longer required to get a license to acquire their first home, but are required for added properties.

When acquiring a residential property, a foreign buyer must obtain a license from the Ministry of Labour, Home Affairs and Public Security. The alien license fee is 25% of the purchase price of a house, or 18% for a condominium. For fractional units, the fee is 10% on first-time sale and 18% on the second.

Non-Bermudians may not acquire undeveloped property, unless they are spouses or children of Bermuda nationals.

Generally, a non-Bermudian cannot own more than one residential property. A non-Bermudian will be permitted to purchase a second property only on condition that the original property is sold within a year.

 





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