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Real Estate dynamics in Egypt – Is there a bubble?

In this paper, the real estate dynamics are going to be discussed in general and then linked to Egypt, where one can conclude whether there is a bubble in Egypt or not. Several articles have been used for this paper, which helped to understand when to know whether there is a bubble or not.

The real estate market is known to be periodic. This periodicity is a function of several entwined fundamental factors that interrelate to create the long and short-run real estate market series, which cause their values and rentals to differ over time. Only the well informed real estate investors can exploit the advantages of these values. Therefore; the real estate market periodicity can either be a blessing or a curse to the market participants, which depends on their understanding of the series. The real estate market cycle could be different from the underlying business cycle in the local or domestic economy. Rent, which is one of the main factors related to the fundamental value of housing prices, has a significant role in the real estate market equilibrium. There occur rental discrepancies, when one compares the value of different locations. Furthermore, housing rent helps estimate bubbles in the housing market, which could be compared with the usage of dividends while measuring the stock prices, in order to identify any bubbles. Both Kim and Suh have investigated real estate bubbles in Korea and Japan, where they found that the bubbles existed between 1974 and 1989. Stevenson’s approach in modeling housing market was built on income, population, housing stock index and interest rates.

An important issue that is not entirely clear is that one should not treat rents like dividends are treated. Even though both of them are similar in the means of that they are cash flows, which are produced from owned assets, one should treat them differently. There is an important dissimilarity between both types of cash flows from the rents and the dividends, which are that stock dividends are settled by the company’s board, while the rent is only settled by the change in demand and supply in the market. A study, which was conducted by Crosby, Devaney, and Nanda was based on the main aspects that led to a depreciation rental value, which was built on samples from UK office and manufacturing assets. They found, that the rents have increased faster than the wages, which they clarified as the demand for living in cities ascends above the wages. In this work, we focus on residential properties and study the explosive behavior of a rent series. One should be able to determine a significant factor that increases demand in the rent market. Identifying how house prices and the rents cooperate and control the equilibrium in the market.

Di Pasquale and Wheaton have established four quadrant frameworks, which is called the DW framework. This framework helps on to study the joining points between house prices and rents. Rents are regulated by the demand and supply in the market, and prices are established by the valuation process, which is established on the DW framework. However; prices can influence the building cost and completely shift the supply of houses in the market, which will lead to a new equilibrium. A proposal made by Dieci and Westerhoff showed that it can produce a distant expansion in the house market changes based on past information of overvaluation. It is also significant to recognize that some simple concepts of system dynamics also exist in typical real estate economics. Di Pasquale and Wheaton have presented an inherent system dynamics model, which connects the key three real estate markets, which are the asset market for real estate property, the consumer market and the construction market. On the other hand, the DW framework entails of an individual stock, where the stock level regulates the yearly rent.

Since the Egyptian Revolution, the real estate market in Egypt is probably the only market that stayed steady. The property market is remaining fit regardless of price surges through the economy, which then led to the flotation of the Egyptian pound, where half the value of the pound was lost in comparison to the dollar and inflation rate is operating at 33%. The expensive real estate developers have responded by rising rates in insignificant relations in comparison with the previous year. The country now has several projects that are there to help ease the overcrowding of the population in Cairo, which includes the New Capital as well as the Suez Canal. The market is functioning normally and it is a safe harbor for the consumers. The question in our economy is generally whether the value of the money invested would depreciate more than the real assets themselves. There are several new properties growing in the market, which are there regardless of the threats. Not only are the new investments growing in Cairo, but also in the North Coast, where different markets are developing, which actually have a high demand from the depositors. Egyptians are not the only people financing in these properties, however; one can find international purchasers as well, which actually helps in the growth of tourism. The fact, that people keep on buying properties, which they use to rent or resell later on has expanded the prices of these properties and increased the fancy investments. There is a great demand in the country on the assets being sold, which decreases the chance of having a bubble.

To conclude, there is a risk of having real estate bubbles, which occurs from the differences between the demand on mortgages and the supply in the banking division. In order to avoid this risk, the real estate developers should start selling the houses, which will avoid this gap and make the real estate market a better place with no bubbles affecting it.

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