The Lebanese housing bubble is an economic bubble

Economic bubble

An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...

 affecting almost all of Lebanon, where property prices have risen exponentially since 2005 (an average 5-fold increase as of February 2010), while the GDP has risen only around 52% during the same period.

Reasons of the bubble

There are many reasons behind the current housing bubble in Lebanon:

• The sharp increase of the price of oil worldwide, which had a positive effect on the salary of the many Lebanese working in Gulf countries.
• The 2006 July war between Israel and Lebanon, that shut down the whole country for just over a month where most Lebanese were left without a job. Many in the Lebanese workforce left to rich Gulf countries to seek jobs in more stable environments. These jobs paid more. Additionally, the destruction of the houses of many Lebanese increased the price of cement and other raw construction materials in the rebuilding phase.
• The relative calm in Lebanon since 2008, which has allowed a lot of wealthy Arabs to purchase multi-million dollar apartments.
• The very low Banque du Liban
  Banque du Liban
  Banque du Liban is the central bank of Lebanon. It was established on August 1, 1963 and became fully operational on April 1, 1964. It is currently headed by Riad Salameh, who was named the Middle East's best central bank governor by Euromoney in 2005....
  
   interest rates.
• The lax bank rules in giving mortgage loans, which essentially depend on giving loans to acquaintances, rather than relying on solid credit data.
• The 2008 - 2009 world financial crisis, which forced many Lebanese living abroad to return to Lebanon seeking better opportunities.

Current status of the bubble

The Lebanese GDP per capita is around USD 10,000 (after taxes) while Lebanese working abroad make on average around USD 30,0000 /year (after taxes). A decent housing far away from Beirut can cost around USD 150,000, a decent housing in the suburbs of Beirut can easily cost 4 times that amount, while a decent housing in the Beirut Central District can cost millions (note that most people who buy in the BCD are Arab Investors). Since home prices are rising constantly, many Lebanese and other investors are buying (through a mortgage) houses in order to resell them later (to other potential investors) at inflated prices. This strategy, as well as other deceptive strategies by the real estate agents left many Lebanese, both inside and outside Lebanon, unable to buy property in Lebanon anymore. Additionally, the inflated home prices are leading to an increase in rental prices, further increasing inflation and decreasing the real income of the Lebanese living in Lebanon. Other Lebanese who are end-buyers (e.g. not thinking of reselling their home) are committing to long term and risky loans in order to repay their mortgage. Since the banks only give 60% of the price of the house, the banking system in Lebanon can sustain a decrease of 40% of home prices in case of a bubble burst, this will increase the effect of the bubble burst on the buyer, as sometimes the 40% can constitute one's life savings (as well as his family's).

House prices in decent areas have increased so much that they're currently much more than in luxurious cities in countries enjoying political stability and a much higher GDP per capita. Although the governor of the Banque du Liban claims that the demand is 'real', there does not seem to be a real logic behind the continuous sharp increase in home prices.

Official reaction to the bubble

Riad Salameh

Riad Salameh

Riad Salameh is the governor of the Central Bank of Lebanon. He was born on July 17, 1950 in Kfardebian, Lebanon, son of Toufic and Renee Salameh...

, the governor of the Banque du Liban, issued two contradicting statements, one in 2008 where he raises fears about a real estate bubble and another one in 2010 where he claims that there is no real estate bubble in Lebanon (although prices have increased 2 folds between the 2 dates) and that the demand is real.

A Skeptical View

A speculative bubble reflects a situation where asset prices are consistently trading at considerably higher values than intrinsic values. In order to evaluate a speculative bubble, we need to have reliable prices and a model to determine intrinsic values.

The lack of official and reliable statistics in Lebanon makes a true discussion of price bubbles difficult. For example, while GDP numbers are widely available -USD 13,200 (2009 est.)-, there is no reliable real estate price index. There is also no current survey of quality of housing in Lebanon, which can be used to determine intrinsic values for houses. The lack of reliable data shows up in discussions of house prices in the Lebanese press, where in the same article different price increases are cited.

Thus, discussion of the "Lebanese housing bubble" relies on subjective evaluations of the evolution of observed real estate prices relative to their intrinsic values.

(In addition, there is also no reliable data to estimate the average income of the Lebanese working abroad.)