The extent of the slump in property prices in the West is only now becoming obvious, and it appears we still have some way to go until it bottoms out. That has huge repercussions for the rest of the world, including the Gulf, which largely depends on the financial health of property owners in America and Europe to drive the global economy. How long the property crash lasts, and how far its plummets, is of crucial importance.
But perversely, property prices in the Gulf, led by the UAE, are soaring. A recent survey showed a rise in Abu Dhabi prices of more than 50 per cent over the past year, and demand for new property in Dubai is apparently inexhaustible. In the age of globalised integration, how is it possible for one region, the West, to be in the throes of a painful property crash, while the other experiences a boom of unprecedented proportions? And can the Gulf learn from the experience of the West to prevent its boom turning to bust with the next phase of the cycle?
The property crisis in the West has reached near-panic proportions. Recent figures show that American property prices fell by 14 per cent in the past year, with the biggest single fall coming in March, the biggest fall in seven years.
Repossessions and associated bankruptcies are also rising.
Nobody is quite sure where this will end. The government backed mortgage business Freddie Mac, on an investment-raising tour of Dubai last month, thought there could be another year of falling prices before the market levelled out.
There is a certain amount of ironic justice in the plight of American home-owners; after all, it was the imprudent lending policies of United States financial institutions that triggered the sub-prime crisis in the first place. The rest of the world will be experiencing a certain amount of schadenfreude as the Americans feel the squeeze first and perhaps hardest.
Except that the property disease will by no means be confined to America. The European property market, which most resembles the US is in Britain, and here too the pain is becoming very real. House prices are expected to fall seven per cent this year and nine per cent in 2009. For a country, which has almost made a fetish of the property, and which has used the rising value of property assets as the basis of its prosperity for many years, the consequences of this collapse are excruciating.
Both the US and Britain are feeling the consequences of this downturn in their daily lives. The credit card bills get bigger, the conspicuous consumption slows down, and the consumer-driven economy also wavers. It is at this point that the financial system begins to feel the strain, and the banks react by imposing harsh credit conditions and withdrawing financial support. At that stage, it has the potential to develop into a real recession. Some feel we have already seen the worst; others, such as financial gurus Warren Buffet and George Soros, think there is still a long way to go. My money is with the gurus.
But what does all this have to do with the UAE, where the prevailing condition is an almost exact mirror-image of what is happening in Europe and America? On the face of it, property in the Emirates is in a cycle of near-unstoppable boom – 53 per cent a year increases in Abu Dhabi, where demand is outstripping supply with every worker the capital's fast-growing economy attracts. In the more mature property markets of Dubai, the rate of increase in value is less striking, but there would be no surprise if it reached 20 per cent year-on-year. Both cities have ambitious long-term plans to expand their populations.
There are other factors at work that argue against the notion of a property "bubble" in the UAE. For one thing, the basic economic growth rate if much higher than in the West. Even if the price of oil were to remain static, or even dip a little, the UAE has enough in the tank to keep the engine of economic growth and diversification growing for the foreseeable future. The property market would reflect this benign forecast with manageable growth.
There is also the fact that the government of the UAE – as the ultimate owner of all land as well as the controlling force behind the big property developers – has the power to fine-tune the property market to a degree not possible in the West. If there is a danger of over-supply, as some have been regularly predicting for Dubai since at least two years ago, with the inevitable consequence of a fall in values, the government can simply turn off the tap of new developments, or at least slow down the rate of delivery of completed projects.
These are very substantial arguments against the notion that the UAE could experience a property crash along the lines of the western economies.
However, there is one fly in the ointment that needs to be tackled.
According to a recent study, the UAE's banks are taking an increasing proportion of mortgage-related debt on to their books. Investors desperate to get on the property ladder are borrowing deposit capital from their banks, hoping rising prices will make this debt insignificant in a year's time. Though this element is still small in relation to overall borrowing, it is a worrying trend, and the banking authorities should keep a watch on it to ensure it does not become a real problem.
This was how the Western economies got into such trouble, by allowing the fortunes of the property sector to become so entwined with the financial system that any weakness in the former would have an automatic effect in the latter, where the real damage has been done.
You could also view the UAE as another example of the global phenomenon of "city state" economies, such as Hong Kong, Macau, Taiwan or Singapore, where prevailing regional economic trends are strong enough to insulate the market from the Western disease. These Asian "city states" are all going through a sustained period of growth in property values that seems impervious to virtually any economic danger.
On balance, then, there seems little danger that the UAE is in the early stage of a Western-type property "bubble" that will burst with ominous consequences for the rest of the Emirates economic life. But the authorities and businessmen who run the property market must ensure that this phase of the UAE's property market growth is well-managed and strategically planned, to avoid the equally serious consequences of a rampaging property market. Inflation, identified by many economists as the most significant negative factor for the UAE economy, just thrives on property booms like the one we are experiencing in the Gulf.