Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE
Print
Email
Discuss this article (23 Comments)Dubai Property Prices - the truth
by This email address is being protected from spam bots, you need Javascript enabled to view it on Sunday, 10 August 2008
According to Malcolm Gladwell's latest book quite often we have discovered the truth of a situation long before we are aware or able to communicate it.
In Blink Gladwell uses a game to demonstrate this. In one example, his test subjects are shown four packs of cards, face down. Two are red and two are blue. Participants must choose the correct combination of cards to make money.
After an average of 50 tries, participants realize that blue cards are the means to greater wealth over time. Red cards are much riskier, and the down side is much bigger than any up.
The point of the game is not to find out how quickly participants can rationalise the game, but how quickly they subconsciously understand its dynamics.
Participants were wired up to see the effect of the game on their heart rates. After ten cards or less, red cards induced palpitations. Blue cards produced no results at all.
In other words the test subjects subconsciously understood the game very quickly, but it took their brain another thirty to forty rounds to be able to explain it - and their actions.
George Soros, the $9bn man who made a large chunk of his fortune betting the UK would crash out of the ERM used to suffer back aches - which was his body's way of telling him he need to change his market holding positions.
This is a quote from his son, Robert speaking to Soros' biographer, Michael Kaufman: "My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it's his early warning system...
"He is... living in a constant state of not exactly denial, but the rationalisation of his emotional state."
Last week I wrote a column on Dubai property prices. It sparked a lot of debate, with many of you giving infinitely superior rationalisations of why I was wrong - and in far fewer cases right - regarding Dubai's housing market. My argument was simple: a lack of decent places to live and work in a booming Middle East give Dubai scarcity value - and that means there was more room for property prices to rise.
Most of you disagreed.
What we are all doing is trying to justify a gut reaction as to where we are on the above chart of what a bubble looks like over time. Some of you may argue we are not on it at all.
I have borrowed this chart from Soros' latest book, The New Paradigm of Financial Markets.
To fully explain the curve I would need to go into Soros' philosophy regarding reflexivity - which would be worthwhile, but not within this column. Instead, I will explain what the stages look like.
The graph or market takes off at point 2. This is when a trend is recognised (house prices are rising), and is reinforced by a bias (the belief that prices are undervalued and will continue to rise). In a bubble this results in valuations considerably higher than 'equilibrium' - the normal balance of supply and demand.
Normally the checks and balances of a market will mean at some point 'testing' will occur (houses on the Palm fell briefly in 2006 as premiums sky rocketed, and the market wobbled in realisation that many units would not be completed for several years - stage 2). In most cases the set back will return a market to equilibrium. In a bubble, however, the testing is shrugged off and both the trend and the bias continue (3), normal rules of the market are jettisoned and prices take off (4). It's at this point, investors are said to be irrationally exuberant, and believe things really can be different this time.
According to Soros, there is always a moment of truth, however - stage 5 - when "reality can no longer sustain the exaggerated expectations". In period 6 people continue to play the game but no longer believe in it. Point 7 is reached when the trend turns downwards (house prices fall) and the bias inverses (property prices are over valued), leading to a "catastrophic" downward acceleration (8), also known as a crash.
According to this model the boom-bust cycle starts slowly (prices rise gently), accelerate gradually and then fall steeper than they have risen.
Given Malcolm Gladwell's argument that subconsciously we understand a situation before we can provide a full justification of what is happening, I would like to conduct a little experiment.
What I would like to do is use the Internet to draw your collective subconscious together to pinpoint where as a group ArabianBusiness.com readers think we are on this chart. I will publish the median score, and if enough of you take part, your best arguments to justify each position.
Those of you who argue that we are at stage 1 are arguing we are not in a bubble at all, but that prices are rising to a genuine equilibrium.
Those of you who argue we are in stage 2 are arguing prices have only just begun their journey, and the market will at some point test and correct itself.
Those of you who say we are on points 3-5 are arguing that we are in a bubble, but we have not reached the peak yet.
Those of you who say we are at poing 6 are arguing we no longer believe in the valuations - and that a crash is imminent.
Very few of us are blessed with a back pain that helps us predict the future. However, what we have that Soros does not is the Internet, and the ability to draw together the gut instincts of thousands. Comment on this article and we will together form an overview of how much leg room property prices have to run. Make sure you detail whether you are talking about Dubai in particular, or the region as a whole.
READERS' COMMENTS
Disclaimer: The views expressed here by our readers are not necessarily shared by ArabianBusiness.com or its employees.
Dubai Property
Posted by Bill on Friday 31 October 2008 at 15:50 UAE time
Puppets in the show!!!
I will say what isn't being said here... Global monetary crisis does effect everything, but prices in the UAE are falling, not because of this trend, but because Dubai wants them to!!! Since when have people been saying Dubai could not sustain their growth year on year, as far as population infrastructure and real estate??? I estimate roughly 10 years!!! Without a word, every single time Dubai shows up at the table to play and proves the many skeptics wrong. That being said, after seeing what happened in the Dubai stock market a while back, do you believe the people who were in charge or major investors lost money during the correction? Actually its just the opposite, they created the correction in order to cash in on the rip!!! Dubai is letting their prices stagnate and not campaigning against it so there wont be a crash later! Is it a coincidence so many large projects got delayed? Do you believe that the few large developers partially or predominately owned by Dubai will hurry up to complete projects to have prices fall sharply and homes stay empty? Do you believe that the new "visa regulations" don't continue to change in order to balance the local infrastructure and housing market? Dubai knows they have to curb inflation, and in response to their need, they allow prices to fall and the market to cool down a bit so it doesn't boil over, but just like the stock market, the major investors will use this opportunity to cash in on the losses of the "little guy"!!! I own some property in the UAE, but I am not a short term investor or someone who buys and flips property, thus I know my investment is sound and will continue to make me money for a long tome to come. I believe this whole circus has been orchestrated to cut out short term investors, and judging by the small price decline its working. Anyway, just thought I would share a different point of view instead of justifying an existing one. In closing if you can buy do it, and if you own sit on it, believe in the leadership which controls the market and you wont be sorry!!!
Posted by Bill on Friday 31 October 2008 at 15:50 UAE time
Puppets in the show!!!
I will say what isn't being said here... Global monetary crisis does effect everything, but prices in the UAE are falling, not because of this trend, but because Dubai wants them to!!! Since when have people been saying Dubai could not sustain their growth year on year, as far as population infrastructure and real estate??? I estimate roughly 10 years!!! Without a word, every single time Dubai shows up at the table to play and proves the many skeptics wrong. That being said, after seeing what happened in the Dubai stock market a while back, do you believe the people who were in charge or major investors lost money during the correction? Actually its just the opposite, they created the correction in order to cash in on the rip!!! Dubai is letting their prices stagnate and not campaigning against it so there wont be a crash later! Is it a coincidence so many large projects got delayed? Do you believe that the few large developers partially or predominately owned by Dubai will hurry up to complete projects to have prices fall sharply and homes stay empty? Do you believe that the new "visa regulations" don't continue to change in order to balance the local infrastructure and housing market? Dubai knows they have to curb inflation, and in response to their need, they allow prices to fall and the market to cool down a bit so it doesn't boil over, but just like the stock market, the major investors will use this opportunity to cash in on the losses of the "little guy"!!! I own some property in the UAE, but I am not a short term investor or someone who buys and flips property, thus I know my investment is sound and will continue to make me money for a long tome to come. I believe this whole circus has been orchestrated to cut out short term investors, and judging by the small price decline its working. Anyway, just thought I would share a different point of view instead of justifying an existing one. In closing if you can buy do it, and if you own sit on it, believe in the leadership which controls the market and you wont be sorry!!!
Dubai property prices
Posted by Manoj, Manama, Bahrain on Tuesday 28 October 2008 at 09:54 UAE time
The main discussion in the article as well as comments posted are the effect of less investors and less money supply on the Dubai property market. However another factor has been overlooked. A large number of properties have been bought by investors from India, Pakistan, Iran just for obtaining the non-resident status in their respective countries to help in their business in their own countries. For example there are some towers by Emaar in Dubai Marina where most of the apartments are owned by Iranians; with nobody staying there. The Indian and Pakistani businessmen are looking to invest their black money and Dubai is the best place for it. For the Iranians, all their businesses are conducted through Dubai due to the international sanctions on Iran. So property prices will come down from the current level due to ongoing economic crisis; but there will never be a crash of prices.
Posted by Manoj, Manama, Bahrain on Tuesday 28 October 2008 at 09:54 UAE time
The main discussion in the article as well as comments posted are the effect of less investors and less money supply on the Dubai property market. However another factor has been overlooked. A large number of properties have been bought by investors from India, Pakistan, Iran just for obtaining the non-resident status in their respective countries to help in their business in their own countries. For example there are some towers by Emaar in Dubai Marina where most of the apartments are owned by Iranians; with nobody staying there. The Indian and Pakistani businessmen are looking to invest their black money and Dubai is the best place for it. For the Iranians, all their businesses are conducted through Dubai due to the international sanctions on Iran. So property prices will come down from the current level due to ongoing economic crisis; but there will never be a crash of prices.
"The truth"
Posted by Paul, Dubai, UAE on Monday 27 October 2008 at 15:25 UAE time
This article is not "the truth", it is simply one person's opinion. And what is the suggestion? That any contrary opinion is not truthful?
"My argument was simple: a lack of decent places to live and work in a booming Middle East give Dubai scarcity value - and that means there was more room for property prices to rise."
Look at the situation on the ground:
1) Oil price crashing
2) UAE stock markets crashing on global recession fears
3) Credit tightening, mortgage deals being pulled - now 65% LTV max
4) Quickly rising AED making Dubai more expensive
5) Recessions in UK and Europe - Dubai's main sources of tourists and property investors
There is no shortage of property in Dubai. There has just been a surplus of speculators. You will be shocked, like the UK was, at how quickly that situation can change. There was a 'shortage' in the UK we were all told (some still claim there is!). And prices then fell off a cliff.
Property bubbles have little to do with the supply of property. They are almost entirely due to the supply of money.
Posted by Paul, Dubai, UAE on Monday 27 October 2008 at 15:25 UAE time
This article is not "the truth", it is simply one person's opinion. And what is the suggestion? That any contrary opinion is not truthful?
"My argument was simple: a lack of decent places to live and work in a booming Middle East give Dubai scarcity value - and that means there was more room for property prices to rise."
Look at the situation on the ground:
1) Oil price crashing
2) UAE stock markets crashing on global recession fears
3) Credit tightening, mortgage deals being pulled - now 65% LTV max
4) Quickly rising AED making Dubai more expensive
5) Recessions in UK and Europe - Dubai's main sources of tourists and property investors
There is no shortage of property in Dubai. There has just been a surplus of speculators. You will be shocked, like the UK was, at how quickly that situation can change. There was a 'shortage' in the UK we were all told (some still claim there is!). And prices then fell off a cliff.
Property bubbles have little to do with the supply of property. They are almost entirely due to the supply of money.
Crash is a big word for this economy.
Posted by Ferhan on Monday 27 October 2008 at 13:54 UAE time
I dont think the normal economic theories apply here simply because of the lack of transparency in the market. I have read articles over articles about companies saying that the market is balancing out and we are going to see a loss if prfit but not investement. And on the other hand, I have heard and read about agents that are on a selling spree to cash out of the crash. Apart from the Emaar, the biggest property developer is sliding in the stock market and alot of CEOs have been caught in corruption charges, yet they claim that the market can only go up.
90% of the people that are living in UAE are expacts. Off that the nationalities that buy property are mostly "Locals". How much can they buy? People that have bought property here are flippers, and the regulations are not that strong from people to stop doing that. The market is still pretty immature. 70% of the property that is being built or have been dilivered are luxurious, and thus a middle income, which is more then 80% does not have the capability to afford such property, either to rent or to buy. Financing for long term is not feasible for the expact since their duration of stay and their status is not permenant, thus commiting to long financial terms seems irrational.
Now that there is a huge liquidity crises aroung, primarily caused by mortgages, banks over here are very tight on giving loans.
I do not want to be a speculator, but my reasoning just tells me that we are in stage.......6....... and the crash is imminent. But just like we dont know what happened to those corrupted CEOs we wont know what, when and how the crash happened?
BTW the real estate crash of Singapore in the early 1990s was kinda similar. Except it did not have the Credit Crunch at that time, it was purely supply and demand!
Posted by Ferhan on Monday 27 October 2008 at 13:54 UAE time
I dont think the normal economic theories apply here simply because of the lack of transparency in the market. I have read articles over articles about companies saying that the market is balancing out and we are going to see a loss if prfit but not investement. And on the other hand, I have heard and read about agents that are on a selling spree to cash out of the crash. Apart from the Emaar, the biggest property developer is sliding in the stock market and alot of CEOs have been caught in corruption charges, yet they claim that the market can only go up.
90% of the people that are living in UAE are expacts. Off that the nationalities that buy property are mostly "Locals". How much can they buy? People that have bought property here are flippers, and the regulations are not that strong from people to stop doing that. The market is still pretty immature. 70% of the property that is being built or have been dilivered are luxurious, and thus a middle income, which is more then 80% does not have the capability to afford such property, either to rent or to buy. Financing for long term is not feasible for the expact since their duration of stay and their status is not permenant, thus commiting to long financial terms seems irrational.
Now that there is a huge liquidity crises aroung, primarily caused by mortgages, banks over here are very tight on giving loans.
I do not want to be a speculator, but my reasoning just tells me that we are in stage.......6....... and the crash is imminent. But just like we dont know what happened to those corrupted CEOs we wont know what, when and how the crash happened?
BTW the real estate crash of Singapore in the early 1990s was kinda similar. Except it did not have the Credit Crunch at that time, it was purely supply and demand!
Mobile
