In America, the housing cycle is the business cycle – that’s the argument made by Edward Leamer, a statistician and economist at UCLA. But is that also true of Dubai?
If you look at the nine peaks and troughs in the US growth rate since the Second World War – excluding the dot-com bubble and 1953, when the US defence department, a major driver of US growth, decided to cut spending in the wake of mass demobilisation – a peculiar theme emerges.
Before the peak of each economic cycle, a drop in residential investment – people buying houses – contributes an abnormally large share to slowdowns in growth in the US. Across America’s seven recessions, it makes up about a quarter of the decline in GDP, which is considerably more than any other input to growth.
Reduced homebuying affects the economy more than other motors of growth, because construction projects are cancelled faster than prices fall.
Almost no one sells their house for less than the dollar amount for which they bought it.
People do sell their houses for less in real terms – the sale price, when deflated by the rate of inflation between the time of purchase and the time of sale, is sometimes less than the purchase price.
But often they don’t notice the difference. Instead, people stop trading houses. And in a market where that happens, construction companies hit the pause button, reducing the volume of houses built.
As Mr Leamer says “it’s a volume cycle, not a price cycle”.
To see why this is true, pretend you are a current homeowner in Dubai. Cluttons sends an agent around to inform you of a bid on your apartment in Dubai Marina from someone willing to pay Dh500,000 – less than the Dh600,000 you paid for it last year.
You are most likely not being offered the “market price” for you home.
That would be the average of trades that are actually made.
You are most likely being offered a price informed by the buyer’s best guess as to what the house price will be at the bottom of the trough, some months or years hence.
So it’s better to hold on, you think, better to wait until Expo 2020, when house prices will go up again.
You sit tight, enjoying the fact that your house provides shelter against the heat and a place to raise the children.
This is currently happening across Dubai.
Dubai Land Department data shows that 69 per cent fewer house sales took place in the first half of 2015 compared to the first half of last year.
Fewer house sales mean that property developers do less house building. In the UAE the biggest developers are state-owned, which means that the rate of house- building is somewhat independent of the current rate of house sales.
Dirigisme brings with it a certain insensitivity to market price and volume signals – and since the Dubai government remains keen to build houses and hotels ahead of Expo 2020, central planning keeps the construction going.
Reidin data supports the view that large numbers of property projects are planned – and that is perhaps reason to think that Dubai’s property slowdown won’t lead to a recession. By contrast, we know that housebuilding dropped suddenly in 2009, in the wake of Dubai’s property price crash.
Data from the Real Estate Regulatory Agency and Dubai Courts suggest that 36 property projects were cancelled, and a further 253 placed “on hold” in the wake of the 2009 crash.
The regulatory response has also been different this time around. In early 2014, the IMF said that the UAE should consider pricking Dubai’s property bubble.
The government had by then already introduced mortgage lending caps, and would subsequently double transaction fees.
This may well have reduced the amplitude of the Dubai housing market’s recent peak and current trough.
Besides, the big, obvious difference between the UAE and the US is that government spending, and the oil sector, account for major chunks of the UAE’s economy.
Oil output remains near all-time highs, and the government has said that it plans only to cut spending on subsidies and grants. So no slowdown here.
But Mr Leamer’s work should give us pause to reconsider the UAE’s economic history – and its susceptibility to future recessions. Despite the financial overtones, and the simultaneous drop in oil, the 2009 crash may have been a straightforward property bust.
If the housing cycle is the business cycle in Dubai, policymakers must zoom in on Dubai’s real estate as an indicator of economic health.
This continues our weekly series of analysis articles by a rotating group of The National’s beat reporters. Adam Bouyamourn covers economics.
