In my local town there is a quite pleasant development of flats with a good view of a spectacular castle, even if the castle does tend to shade the flats somewhat. They are right by the water in the center of town and even have parking available, after a fashion, yet the majority are unsold. The law of supply and demand says that since the demand is not there, the price will fall until the flats reach a price where the demand is there and they sell. This has not happened.
Today, as I was strolling past the flats along the river, it occurred to me that one reason why so many of the flats are still empty could be that the developer borrowed heavily to finance the development and that the loan is secured against the value of the flats. Reducing a single unsold flat reduces the value of all the unsold flats and thus reduces the value of the collateral against which the money has been borrowed. In these days, it is "cheaper" to go on paying the interest on the loan than it is to devalue the collateral by reducing the value of the flats, plus there is always the chance that land prices will start to go up again and the flats will sell. Added to which, if the reduced collateral puts the borrower in negative equity, the lender will get nervous that the borrower will simply go bust and so will try and get their money back early, which the developer equally doesn't want.
Debate Magazine
