In greed we trust
Tue, 06 May 2008 01:30 PM – Dubai Time

ArabianBusiness – “Buy land, they aren’t making it any more” is a statement attributed to Mark Twain, who, in an Orwellian moment, must have had visions of the Dubai property scene over 100 years hence.

There’s not much evidence that local residents are au fait with contemporary American literature, so there must be other reasons behind current trends, where off-plan developments in a piece of yet to be drilled bedrock are fetching Dhs3500 a square foot.

Think about that for a moment – $1.5m for a virtual two bed apartment in a building site, quite probably from a developer yet to hand over the ownership keys to even one completed project.

As a result, dinner table conversations in Dubai are once again reminiscent of London in the 1980s, when status was measured by an address and a simple greeting met by a diatribe on the glories of gentrification.

What strikes me most about the current property environment is that operators genuinely believe it’s different this time.

Even in the UAE where it’s tantamount to high treason not to wear rose tinted glasses at all times, our old friend, irrational exuberance is stepping into new territory.

And yet what reasons over those peddled so far makes things any different? Inflation is running riot, DEWA bills are increasing, at least for those who pay them and there’s scant evidence of salary increases.

The rate of growth in population has slowed measurably, with net immigration to Dubai in 2007 one third of the previous year.

Rising costs are forcing companies to consider relocation, even in DIFC where the cracks are slowly appearing and rumours of the first departures are rife.

Foreign investors meanwhile are hit by global property and financial market reversals of their own.

Despite savage cuts in interest rates, it’s apparent that borrowers in the west are yet to feel the benefits.

In Dubai, however, consumer loans are up 47% this year, with banks failing to show the required restraint in the face of an obvious liquidity surge. For this we should be fearful, as easy lending policies are perhaps the greatest contributor to runaway house prices, in my opinion.

Greater money supply in the economy as a whole will contribute to overall inflation, but if you distill this to mortgage lending in the housing market, the loosening of lending criteria is akin to doubling the money supply in a single sector of the economy.

By easing money supply but not housing supply in this way, it’s possible to herd the population into funding the economy by taking on ever-greater debts, whilst at the same time convincing them they are getting richer. Here comes the miracle economy; just add water and watch it grow.

Unfortunately it doesn’t work like that as genuine growth has not really occurred and real value has not been added anywhere. Such a self-fueling bubble requires prolonged levels of personal debt just to maintain stability.

If the supply of fresh money runs out or the ability to borrow slows – a totally feasible scenario given the credit crunch – then the edifice collapses.

But this is new paradigm country and whilst the gravy train remains on track, it apparently foretells unprecedented good for us. Property prices, already a cause of massive concern to earthbound members of our community, are seemingly the yardstick by which we must measure our own and the country’s well being.

Unfortunately, the same biased and self-centred notion of what constitutes good reappears constantly. If inflation is and was the pet hate of every country since economists invented themselves, then why are perpetually rising house prices seen as the sign of a healthy economy?

We talk about the property ladder as the crucial pathway to success. The refrain from old hands that “I’m sure you’ll get on the property ladder soon” implies t

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