Friday, 2 March 2012

The Property Boom



So how did the recent property boom began? How did Dubai change from becoming mainly covered in sand to many exciting, high rising structures?









Sheikh Zahed Road, the main road in Dubai in 1991













Sheikh Zahed Road, the main road in Dubai in 2005







There are two main reasons.

Firstly, the government continued to invest in real estate to ensure Dubai would become a commercial hub.

Secondly, investors could get access to credit very easily due to low interest rates worldwide.

It all began in May2002 when Sheikh Mohammed changed the law which allowed foreigners to own property in certain areas of the city. Before only Emirati nationals could own property. It could not rely its oil reserves, which only accounts for 6% of its income.  It needs to continue to attract foreigners by boosting its tourism sector and commercial activity. One way to achieve this is to follow the philosophy of “Build it and they will come”. 

Around the same time as the new legistslation was introduced, the Palm Jumeriah proposed plans were announced and all 4,000 off-plan properties were sold within 72 hours.

All 700 off-plan villas were sold out in a few hours when the prestigious residential property called “The Meadows” was released.

The change in the law opened up Dubai to the world and attracted huge amounts of foreign direct investment. To begin with new properties were relatively cheap selling on average £25,000 for a one bedroom accommodation. Investors saw great investment opportunities. Some investors made around 20% profit on their investment the next day. Property buyers were made up of around 85% of property investors in comparison to 15% in the UK.

Gareth Campbell (2012) describes the investors in the British Railway Mania were myopic but rational. Myopia is when people based their investment decisions on the short-term and are unable to predict what may happen in the long term. This behaviour applies to the property investors in Dubai as many off-plan properties were bought and sold several times before it was sold to the people who decided to live there . They were only concerned on how to make a quick profit. Believing prices would continue to rise, they would purchase more and more property in the belief they would sell to make a quick profit.

So where had these investors come from and where were they getting their money from? Majority of the investors came from abroad; only 28% of buyers were Arab nationals so there was a huge reliance on foreigners to make Dubai prosperous. In 2002, interest rates around the world were low. For example, in the US, the Federal Reserve deliberately kept interest rates low so credit could easily be accessed.

Allen and Gale (2000) explained that financial liberalisation can be a big factor in why asset prices such as the housing market may rise and fall sharply. When there is a credit expansion, investment and consumption increase so asset prices increase. When there is a credit squeeze, investments stop and asset prices come to a crash. I will show you later that even Dubai can’t avoid the property crash. 

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