Let the market fall

"The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid."

So begins the first paragraph of a story in today's edition of the New York Times that describes how the efforts of the government have failed to keep home sales from plunging over the summer.

It's a relevant discussion for the UAE, where the Government is continuously weighing the pros and cons of stimulating the property market or interfering with the decline in sales. So far, there has been some indirect support, particularly in Abu Dhabi. This has included Aabar Investment's buying of some Dh5 billion worth of land from Abu Dhabi developers at relatively high prices and Abu Dhabi Finance being able to borrow cheap funds from the Ministry of Finance to keep mortgage rates in the capital low. The latest and most dramatic effort would be Etihad Airways informing its thousands of employees that they could not use their housing allowance in other emirates than Abu Dhabi. Still prices have dropped precipitously.

Dubai, on the other hand, has taken a more laissez-faire approach to its housing industry (perhaps they had no choice). Prices have fallen by as much as 70 per cent in some truly unfinished areas, while the average has been more like 50 per cent. Rental rates have plummeted and vacancies are at an all-time high.

The changing landscape of the property market has led to thousands of Abu Dhabi residents fleeing the highly priced and generally lesser quality housing in the capital and living in Dubai's more established residential communities such as Jumeirah Beach Residence and Old Town. That would be a natural market reaction - when prices drop, people take advantage. This happened even within Dubai itself, where people upgraded from Sharjah's dormitories to Discovery Gardens and from Discovery Gardens to the Marina. 

It would be interesting to hear more about the policy discussions under way at the top. There are certain subtle changes that could help Dubai's market overnight. If buyers of property could again receive three-year residency visas, then the Indian, Pakistani, Afghani, and Iranian buyers who want a safe nest egg in case things got rough at home would probably sweep through the market again.

That is the kind of change that is easy to stomach: removing onerous obstacles to sales. What the country doesn't want to do is place crutches under its industries to the point where they no longer have a momentum of their own. If you let the market fall, then there will be widespread losses for those who bet prices would keep rising but you present a platter of opportunities for new buyers. 

So the dilemma for the UAE is akin to the one in the US. Do you help yesterday's buyers or today's? My vote is for the buyers who are in the market now. By letting them take advantage of properly depressed prices, more money will flood into the economy. Prices will naturally begin to rise again and enough confidence could be restored to make potential owner-occupiers feel more comfortable with buying a home they may only live in for five years.

Note: Saying that I support free market principles doesn't mean that I think the UAE shouldn't prosecute fraudulent developers; it means that where honest investments failed, people have to take losses.)