Housing a luxury good for POM residents: Study

A study by the National Research Institute (NRI) highlights issues concerning the real estate industry, especially in Port Moresby. Below is an abstract of the study – Determinants of residential property prices as perceived by real estate agents and landlords in Port Moresby.

THE property market in Port Moresby has experienced unprecedented growth since the construction phase of the Papua New Guinea Liquefied Natural Gas (PNG LNG) project.
More houses have been constructed in the city to boost supply relative to demand.
However, house sale prices and rent have remained beyond the reach of most residents of Port Moresby.
Furthermore, the State-owned land coveted by property developers is almost exhausted.
This pushes up the price of land for development and contributes to the high cost of house construction.
However, it is not clear how real estate agents and landlords, who play an important role in transactions and negotiations in the property market, determine the sale or rent price of residential properties.
The Government, through its relevant agencies, has been attempting to address issues associated with housing affordability in major cities of the country, including Port Moresby.
However, no strategies to resolve the affordability problem have been identified.
Understanding how real estate agents and landlords determine residential property values will assist policy makers and planners develop interventions to address the housing affordability problems.
NRI conducted a study into factors that real estate agents and landlords consider when determining residential property and land prices.

Findings:
Of the 27 interviewees, 33 per cent were primary real estate agents, 26 per cent were secondary real estate agents, 22 per cent were landlords, and 19 per cent were freelance agents.
The real estate agent interviewees had extensive management experience in the real estate sector that ranged from four to 20 years.
All interviewees had formal education and qualifications (eg, certificates, diplomas, and undergraduate degrees in various fields).
Most of the real estate agents were registered with the Investment Promotion Authority.
All of the landlords had titles over their properties.
The real estate agents and landlords deal with various types of properties, including standalone houses, apartments, townhouses, and shared accommodation.
Real estate agents also deal with sales of vacant land.

The findings show that the value of residential property in Port Moresby is determined by both economic and non-economic factors.
However, there is no direct relationship between personal characteristics of interviewees, such as year of experience and level of education, in determining property value.
Real estate agents and freelance agents play intermediary roles for property buyers and potential tenants.
Landlords offer their own houses for rent.
Approximately 70 per cent of the interviewees use both daily newspapers and social media to advertise land and houses for sale and rent.
Other mediums of advertisement, such as agent websites and public notice boards, are used to some extent.
Increased income earning opportunities in the city influence residential property value.
The construction phase of the PNG LNG project boosted economic activities in Port Moresby because many people worked on the project site and in spin-off businesses.
The parent company and contractors demanded more rental properties to accommodate their employees during the construction phase, and some contracting companies even bought properties for long-term accommodation.
The high demand for residential properties during the PNG LNG construction phase resulted in a sharp increase in residential property prices.

The real estate agents and landlords indicated that more people were migrating to Port Moresby from other provinces in search of jobs, better services and business opportunities.
The increase in population size puts pressure on the existing housing stock and creates excessive demand for sales and rental residential properties in both the formal suburbs and informal settlements.
Most formal suburbs and some informal settlements could not contain the increased housing demand resulting in high property prices.
The property developers cannot construct more houses due to shortage of state land, which result in an increase in informal residential property developments on customary land in the outskirts of the city.
One interviewee, who had lived in Port Moresby for 22 years, reported that the population growth had affected residential property prices.
In 2006, before the PNG LNG construction project, the sale price for a registered vacant block of land that he owned at 5-Mile was valued at K100,000.
However, the same property without any improvement was valued at K300,000 in 2015.
He further reported that state land for housing development is almost exhausted, yet the demand for it remains high because of population increases in the city.

Determinants of property values:
Our findings show that house sale prices in Port Moresby are determined by location, physical attributes, environmental factors, neighbourhood characteristics, and market forces (Figure 3).
Most interviewees who belonged to the real estate agents group reported that they compare prices of similar houses, particularly in terms of improvements made, location and accessibility to infrastructure and services, before making a decision about the final sale price and rent value.
Almost all of the interviewees compare prices and do market appraisals using historical sales data from newspapers and agent websites.
Approximately 48 per cent of the interviewees reported that location of a house is highly regarded when determining the sales price.
The properties that are located in friendly neighbourhoods and prime zones attract higher prices than those on fringes of the city.
The real estate agents agreed that irrespective of current property market movements and economic conditions, house sale prices will still remain high in Port Moresby.
This is because the rate at which houses are constructed has not met demand.

Discussion:
The findings from this study reveal that most real estate agents and landlords in Port Moresby determine sale price and rent for houses by comparing property prices that other agents and landlords have adopted.
This suggests that real estate agents and landlords in the city fix house sale prices and rents without giving much consideration to the house’s characteristics; this finding has already been reported in the housing supply and demand literature.
Because house rent is mainly determined by house owners and real estate agents rather than by market forces, tenants may not get a fair price; indeed, the houses for rent and for sale appear to be overvalued.
If the intention is for tenants and house buyers to get a fair price, the government should consider providing an enabling environment for the private sector to construct more houses for rent.
Creating an enabling environment would include freeing up more land that has proper titles and providing financial support through low interest rate loans.
This approach should be complemented by relevant government agencies, such as ICCC, regulating house rent.
It is important to note that if house rent is regulated without an increased supply of houses for rent, the tenants will benefit only in the short-term.
However, in the long-term, property developers may reduce the supply of houses for rent relative to demand, which would automatically push up rent again as reported by Diamond et al. (2019).
Real estate agents and landlords reported that increases in population influence house sales and house rent value in Port Moresby.
The increase in population corresponds to an increase in demand for housing relative to supply, which has the potential to increase house prices. The estate agents and landlords believe that people migrate from rural areas to the city in search of better job opportunities.
This increase in population adds pressure to the existing available housing stock
Economic development in Port Moresby that resulted in the construction of new roads such as the Koura Way, Ring Road and Taurama Road increased residential property value in these areas. Real estate agents and landlords reported that the developments triggered demand for residential properties there, which increased house prices.

Conclusion:
Housing is a basic necessity that accounts for a large share of consumer price index.
However, housing is becoming a luxury good for some Port Moresby residents.
This paper provides more insights into the strategies often used by real estate agents and landlords to determine house sale prices and house rent.
Study found that real estate agents and landlords often determine house sale prices and house rent respectively by comparing prices with their colleagues.
Landlords often consider the background of a potential tenant when determining house rent but do not consider the location and improvements made to the house.
However, real estate agents consider the location of the house and any improvements, such as maintenance, when determining the sale price or rental value of a house.
Real estate agents and landlords both consider market forces when determining house sale price and rent value.
This indicates that house sales and house rent are at the mercy of real estate agents and landlords, which means they have the incentive to fix house sale prices and rent because there is no regulation of their activities in PNG.
In this situation, tenants and house buyers are price takers.
If the Government intends to protect consumers (tenants and house buyers), there is a need to tackle the supply side of housing affordability problem.
This can be achieved by providing enabling environment for private developers to construct more houses.
This includes facilitating the release of land with proper titles, providing basic social infrastructure such as piped water, good road networks, electricity, and sewerage.
The government should consider regulating the activities of real estate agents and landlords.
This has the potential to reduce the tendency of real estate agents and landlords to undermine government’s affordable housing initiatives.