Tuesday August 11 2009

Could the slump in Dubai property prices be Barack Obama’s fault?

Dubai’s property market has long relied on demand from the Middle East, India, Pakistan and Iran, where investors faced with chronic political and economic instability look to Dubai as a safe haven.

By lowering anxieties in the region with his more accommodating foreign policy, Mr Obama may have reduced the political impetus for buying in Dubai.

“Dubai has depended on insecurity in the rest of the region,” says Sayed Bozorgnia, a visiting assistant professor of economics at Abu Dhabi University’s College of Business Administration.

Under Mr Obama’s predecessor, George Bush, the US was a regional wild card. Now, Mr Bozorgnia says, “there’s a little more stability”.

He says the Obama factor is only one of several reasons why Dubai property prices are likely to keep falling this year.

He and his students, many of whom he says are property investors, have identified a vicious circle of diminished expectations and falling prices that raises questions about the wisdom of having relied so heavily on property to diversify the country’s economy away from oil.

Along with diminishing fears of wider regional conflict, something many thought was a distinct possibility when Mr Bush was in office, demand for property in Dubai is falling victim to declining wages and rising job losses. Even if property owners are not losing their jobs, tenants have been made redundant, affecting demand for rentals and pushing rents lower. That reduces the yield on property relative to other investments and makes renting more attractive to residents than buying.

“As long as rents are falling, people are not inclined to purchase,” says Mr Bozorgnia. “In addition to that, the population has been falling. A lot of people have left or are thinking about leaving.”

And as long as potential buyers fear conditions point to a decline in prices they tend to delay purchasing, further sapping demand. The same kind of psychological effect applies to supply. Developers fearing prices will fall further are rushing to sell at discounts, Mr Bozorgnia says, placing further downward pressure on prices as they hunt for buyers.

“Since firms think prices are going to be lower, they want to unload as much property on to the market as possible,” he says. “So your supply side has increased; your demand has decreased.”

Demand is unlikely to improve, according to Mr Bozorgnia, until banks ease mortgage conditions, a conundrum the UAE Central Bank is still struggling to solve.

Banks’ willingness to lend for property purchases, after all, is unlikely to improve while the outlook for prices is so dim. Banks are already experiencing rising mortgage defaults.

Persistent weakness in the property market is not good news for the nation’s economy. Property and construction are the UAE’s largest employers and, after oil, its largest source of income.

In the future, Mr Bozorgnia says, the country would do better to promote other industries, not by buying up global champions but by luring innovators and entrepreneurs.

“Most good ideas come not from huge organisations but from small companies,” he says.

The UAE may not hold much allure for start-ups, however. It ranks 46th on the World Bank’s ease of doing business list, behind Bulgaria, Armenia and Tonga. Much of the foreign investment that poured into the country over recent years has been to take advantage of the property boom. But with the global economy still struggling to emerge from the downturn, buying from the country’s top sources of capital, India, Pakistan and Britain, has been in steady decline.

So are purchases from Iran, which despite recent election unrest no longer faces the prospect of a US invasion. Purchases from Russia, relations with which Mr Obama has pledged to reset, have also dwindled.

Source: The National