Modern economies are complex and interdependent systems whose components should work together to create value.
Technological advancement, taxation, consumption, and productivity, for example, are all forces that work together to power the economic machinery. Each of these components has a critical part to play in driving economic expansion or creating economic recession depending on if they are working individually and together as they should.
In The Bahamas, we hear quite a bit about the tourism and financial services industries—two of our largest sectors counting for the lion’s share of our economic activity. We know when tourism numbers are up or down, and we are all aware when our financial services industry is under threat from external forces, like blacklisting.
Both of these sectors rely heavily on external dynamics like foreign direct investing (FDI), the disposable income of foreign nationals which might translate to tourist spend, or the health of international capital markets. We do not, however, hear enough about the components that drive our economy internally.
Tracking activity in the housing market, for example, is one of a number of indicators that can predict the health of the wider economy. As a barometer for consumption, the housing market, among a number of other benchmarks, can signal economic expansion, caution or recession.
When we refer to the housing market, we mean the supply and demand of residential units—both the construction and purchase of houses.
Building permits, and housing starts—the number of new residential construction projects that have started during any period—can be early indicators of activity in the housing market specifically.
In developed economies, like in the United States, analysts watch the housing starts figures each month, comparing them with previous months’ data and year-over-year periods to spot trends in the market and to get a sense of the direction of the broader economy.
The importance of this sector cannot be understated because new housing construction leads to other types of economic activity. Housing starts influence related industries, such as banking, the mortgage sector, insurance raw materials, employment, construction, manufacturing, and real estate. Government revenue also increases through real property tax, employee contributions and other forms of taxation.
Tracking building permits can provide an estimate of the number of new housing units that have been authorized by the government. Sustained growth in building permits is often viewed as a positive sign for economic growth and indicates that more investment will likely be allocated to the housing market.
Given the importance of the housing market as an economic driver and housing starts and building permits as indicators of economic health, this sector and its regulators must operate efficiently.
As an experienced real estate developer, with both residential and commercial properties as a part of our portfolio at Brickell Management Group, I echo the recent concerns expressed about the lengthy delays for the approval of building permits. The building permit process can be delayed for longer than six months in some instances.
I acknowledge the government’s stated commitment to slashing the time taken to obtain building permits by 75 percent, but based on the comments made by Gustavus Ferguson, president of the Institute of Bahamian Architects (IBA), we are still a long way off from realizing this policy goal.
As Ferguson stated recently in a local daily, just like in the US, construction is a vital component in “stimulating the Bahamian economy and getting the money to flow”.
A primary example of this is during the 2008 global recession where there was a considerable slowdown in the construction sector in The Bahamas, especially as it relates to the domestic investment in the sector, according to the State of the Nation Report. The assertion of a slowdown in the construction sector is supported by a fall in residential construction permits from 2005 to 2018.
More recently, the number of new construction permits issued in the third quarter of 2018 (413) was higher than in the third quarter of 2017 by 112 or 37.2 percent. Simultaneously, the number of new construction starts increased by 36 or 41.4 percent between the third quarter of 2017 (87) and third quarter of 2018 (123).
While this suggests some economic expansion, permit approvals seem lower than where they should be to stimulate economic growth.
Without the six-month delay, how many more permits may have been issued? Would we have seen even more significant real investment and growth in this sector? What would have been the effect on the broader economy?
Beyond just delays in permitting, according to the Inter-American Development Bank (IDB) publication, “The State of Social Housing in Six Caribbean Countries,” a housing needs study conducted in 2000 estimated that to meet new household formation, reduce overcrowding and replace old dwellings, The Bahamas would have to produce 28,530 units between 2000 and 2011, or an average of 2,378 units annually over that period.
As the statistics on housing permits and starts above suggests, we do not approach the recommended average yearly production amount for new residential units, creating an ongoing housing deficit.
Along with a more efficient approval process, and as a part of a cohesive policy solution to the housing deficit, the government should consider incentivizing developers to build residential units.
In the past, the government may have taken on the task of bridging the void left by the housing deficit. But given our current fiscal position, the government must instead find a means of tapping, monetizing, and then channeling the resources it does have through a strategically selected set of incentives, mandates, or tax advantages that will make the development of housing for working and middle-class Bahamians a paying proposition.
This approach to a holistic and cohesive housing policy solution will not only spark a construction boom, but also solve the ongoing housing deficit. However, no solution will work unless the permit approval process is working efficiently.
The Prime Minister’s Delivery Unit report indicated that the government is working to reduce the time taken to obtain permits from 120-plus to 30 days. This commitment must be taken seriously for the health of the Bahamian economy and the benefit of Bahamian consumers. This reduction in the time taken to obtain building permits should sit within a comprehensive policy to spur growth in the housing market, solve the problem of the housing deficit and drive economic expansion.
As a Bahamian developer, I stand ready to assist the government in any way I can to improve the ease of doing business in this sector. I am sure I can speak for the many other professions and business whose livelihoods depend on the housing market when I say, we all stand ready.