UAE property boom stokes high inflation

 

UAE’s inflation is a direct result of its booming economy, and its property sector has been the major inflationary contributor thus far.

While the price of properties in a given area has risen by 300 to 400 per cent since late 2003, the same trend has also taken place in the construction industry; with the price of material and segmented construction packages such as MEP, enabling works, curtain wall, structure, all on the increase ever since, and will continue the upward trend without hesitation.

 

This is primarily due to increasing demand and a lack of considerable supply, which pushes the prices to levels that are incredibly higher than the existing inflation rates.  There are factors that play a prominent role in pushing the prices upward, and that they create a ripple effect or a sort of supply chain that contaminates the whole economy.

 

If property market is booming and developers are making good profits, then the main construction contractors feel obligated to follow suit and raise their gross margins to rip the profits of a booming economy.

 

Subsequently, other sub-contractors and suppliers in the construction industry would soon do the same. And very soon the whole process orchestrates the prices to a level accepted and practiced by all members of a given segment of the industry.

 

And that is how the prices are continuously increased and passed from one segment to another to cover the entire construction industry and property sector.

 

However, the unfortunate thing is the fact that all these price rises are eventually passed on to the end-users.

 

The continuous price increases act like a contagious disease, that once they are released, they get passed on to other areas of economy and general expenditures without leaving a footprint and/or visible transparency. This is how the entire economy is affected by the boom in one area, which causes the inflation to spread and be felt by the general public.

 

Inflation is a very destabilising element within any economy. It erodes confidence and casts a serious doubt on business as well as economic planning. A runaway and out of control inflation has a psychological and widespread negative impact on the economy, businesses and the society as a whole; as it becomes an un-predictable variable that prevents adequate and rational planning for both business entities and ordinary individuals. This will eventually lead to indecisiveness and lack of enthusiasm in general, which in turn may cause a sense of withdrawal and slow down in the economy.

 

Although inflation is a natural and unavoidable element of a booming economy, it should however be monitored and controlled, in order to minimise its impact to an acceptable level.

 

As UAE’s economy gains momentum, it releases all the potential inflationary elements that are incubated and await an opportune moment to harm the economy.

 

Fortunately, the government has identified inflation the most harmful element to the UAE economy and it has announced its commitments and determination to do whatever it takes to harness it and to rein in its impact. This approach is significantly important, since this public enemy number one has the potentials to undo all that is achieved here with so much effort and enthusiasm.

 

This may be a difficult task given the tremendous flow of investments in the UAE year after year, but it is feasible and also extremely imperative for UAE’s future.

- The author is chairman of Saba Properties.