Creating bubbles that can be managed better

This article appeared originally in Gulf News: link to original artic

I already miss the real estate offers of the past. Back then when no one asked for one-cheque payments.

Some landlords were OK with as many as six cheques, while others would offer you a one-month free stay. Back then no one asked your name, where you come from, where you work, what your job title is, and how long you have been working there. Honestly, they only had to ask for a six-month bank statement for this to turn into a credit card application.

I am not against any of these practices when demand starts picking up, but why does it always have to be an extreme? And what’s worse than all of this is that the Expo 2020 is seven years away.

Speculation that is based on actuals is good as it is one way for a price incline, but a sudden unexplainable surge in prices without clear justification is the fastest way towards a real estate collapse.

What happened in 2008 was no different; people speculated in properties that were yet to be developed. Prices kept going up, and people financed purchase through financial institutions that did not do their homework. Therefore, you ended up with overpriced properties and people not able to pay.

Again, speculation is good when it’s created by pure demand and when the market is not overwhelmed by excessive supply of units. And do not forget that the proximity between Sharjah and Dubai does not help any sort of speculation except if the unit was unique in terms of location or features … but then good luck with finding these.

Also, remember that too much speculation without any basis would lead to exotic inflation, that will turn contagious and spread to other products in a matter of months. Eventually, that will lead to the dilution of income and would enact the need to increase wages to match such inflation.

Vicious cycle

And that will also lead to an increase in price levels as per any announcement of increase in salaries, resulting in some sort of a vicious cycle, that goes on and on. If you have been watching the stock markets of Dubai and Abu Dhabi lately, you will notice that stocks in both were speculated downwards a week before the voting on the Expo 2020 bid.

Investors as well as speculators made money from everyone who panicked and sold stocks at the time. The downward speculation is still there, though Dubai’s market picked up a bit in early December.

Emaar announced lately that it will not allow any reselling of its properties while still on maps. Likewise, there was the hike on property transaction fees by 4 per cent. And Dubai Land Department has also announced that it will watch and prevent any unexplainable increase in rents to prevent speculative actions. I really do hope so.

Nonetheless, I am not sure how much leverage they can apply on separate landlords to ensure that speculative behaviours are watched and are kept on a short leash, especially for freehold properties. For those seeking to rent an apartment in Dubai in good areas, you will notice how landlords seem very indifferent about whether or not you rent.

As for apartments listed for sale, a real estate agent informed me of a case he had where the owner increased his asking price from Dh1.6 million to Dh2 million the day after Dubai won the bid to host Expo 2020. In such a case, I do wish that demand in the market will correct these behaviours by not adhering to such increases.

And whether or not property authorities take action, speculators, investors, and people dreaming of owning their own homes should have learnt a lesson, the tough way, from the last property market descent.

Speculation creates bubbles. And bubbles in the housing market earlier resulted in the catastrophic financial meltdown. Now, according to Dr. Roubini who is a professor at NYU: “Bubbles are reappearing in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, Hong Kong, Singapore, and China”.

The problem is not with bubbles entirely as they are one way for price appreciation and asset value inclines. However, the size of such bubbles should be controlled along with their growth rates. So, when bubbles burst, as they will, the repercussions are not tragic as the size of one bubble in line with one’s marketplace became relatively too small to have a major effect.

If anything, it implies that the market has grown in size to a point where such bubbles are completely contained. Now the last thought that I want to leave you with is this: can Dubai outgrow these bubbles by the time Expo 2020 is hosted?

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