According to Mr Kim Lund of ReMax, who can normally be relied upon to paint the most glowing of pictures of the state of the property market in the Cayman Islands, real estate transactions are now “stagnating” as a result of Government revenue measures introduced last year.
Our first reaction to this is that, if Mr Lund admits it’s bad, it must really be bad.
Of course, this should hardly come as any surprise to anyone, especially readers of Cayman Net News, because we have been warning of just such an effect of ill-conceived and poorly understood measures such as the rollover policy for many months.
On top of the fundamentally negative environment of higher interest rates, which no one can do much about – despite pompous announcements from government that they are going to have “discussions” with the banks – the ongoing amateurish tinkering with the supply and demand mechanism was sooner or later going to have, as we had warned over and over again, serious adverse unintended consequences.
And we have, moreover, probably not seen the worst of it yet.
The increase in stamp duty for non-Caymanians last year was intended to be a new revenue measure but, surprise, surprise, increased costs result in reduced demand, fewer sales and, ultimately, less revenue, not more.
On top of a fall in revenue for the government has been the adverse financial effect of slower or non-existent sales for the entire real estate sector.
How many times have we seen major countries raise tax rates, only to find that their revenue collections fall?
Yet, generally speaking, when tax rates are reduced, people are given more incentive to make or earn taxable income or profits and tax collections increase correspondingly.
We saw this occur on a very large scale during the ‘Iron Lady’ Prime Minister Margaret Thatcher years in Britain and the President Ronald Reagan administration in the United States.
Regrettably, it seems that these very predictable economic effects are apparent to everyone but the government of the Cayman Islands.
To compound the revenue loss sustained as a result of increasing the stamp duty for non-Caymanians has been the corresponding duty reduction for Caymanians, so the government’s income suffers an eminently foreseeable double blow.
Then we have the equally predictable consequences of the immigration term limits, or rollover policy. It stands to reason that foreign workers, who now have absolutely no prospect of ever being allowed to stay here on a long-term basis, are not going to invest in buying their own homes here.
This further depresses the real estate market and the government’s share of revenue generated by it. The government derives no financial benefit from residential rental accommodation to anywhere near the extent it would have done from property sales.
Stay-over tourism is also taking a backseat to cruise tourism, despite protestations to the contrary. Cruise visitors do not even look at property here, let alone buy anything as a vacation or second home.
The government is apparently pinning its hopes on an equally absurd and ill-fated campaign to attract the rich and famous but, even in the highly unlikely event that there is any success at all in this respect, how much difference will all these illusory millionaires have on the market as a whole, and how long will it take for these benefits to be realised?
In case no one had noticed, the property markets in larger countries such as the US are also suffering from the effects of higher interest rates and we haven’t seen the full extent of it yet.
In the US, building permits are sharply reduced, which will soon lead to a fall in the number of housing starts and a correspondingly depressed real estate sector.
Local and state governments there are by no means in the state of blissful ignorance that the Cayman Islands government labours under, and are therefore taking active steps to mitigate the effects.
For example, Florida is considering a proposal to increase sales tax across the board and reduce property taxes, in the hope and expectation that this will stimulate demand for real estate by making it less expensive to own. In other words, the exact opposite to the measures introduced by our government in its wisdom.
Will the current government of the Cayman Islands change their minds and revisit (or preferably revoke) some of the measures they have imposed in an effort to resuscitate the economy?
We hope so and they should take note of a very wise old Caymanian saying, which states: “Only fools don’t change their minds”.
