Trouble at home

“When you combine ignorance and borrowed money, the consequences can get interesting.” — Warren Buffett. We should all be wary of the comments coming out of the property world over the last two weeks.

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By  Stephen Corley Published  March 26, 2006

|~||~||~|“When you combine ignorance and borrowed money, the consequences can get interesting.” — Warren Buffett. We should all be wary of the comments coming out of the property world over the last two weeks. “The market is still soft, however, there will be a strong uptake when the new property law is announced, for which we are all waiting. A lot of real estate funds are waiting for the law to be issued so that they can enter the market.” “The market is soft, but not down, there are additional buyers as well as investors.” “Dubai’s property market, which has softened over the last few months, is likely to experience a near-vertical uptake once the new property law is announced in the coming weeks.” “This is wonderful news for the expatriate community and will cause an eruption in property prices.” Even more worrying is the insistence, primarily by agents, that the advent of the new property law will bring new entrants to the mortgage market, creating fiercer competition, as well as resulting in reduced borrowing costs and therefore greater numbers of investors and a further rise in prices. Easy lending policies are perhaps the greatest contributor to runaway house prices, in my opinion. Greater money supply in the economy as a whole will contribute to overall inflation, but if you distill this to mortgage lending in the housing market, the loosening of lending criteria is akin to doubling the money supply in a single sector of the economy. The result is spectacular hyperinflation. By loosening money supply, but not housing supply, it’s possible to herd the population into funding the economy by taking on ever-greater debts. The bizarre thing is even as people borrow more and save less, they actually think they are getting wealthy. And yes, they are funding the economy by buying cars, computers and furniture with the ‘free’ money. For those involved, it’s another step towards the miracle economy. Simply light the blue touch paper, then stand back and watch it inflate and grow. Unfortunately it doesn’t work like that. Genuine growth has not really occurred — real value has not been added anywhere. What has actually been created is a self-fuelling, self-growing bubble that requires ever-increasing amounts of debt to be taken on at an ever-increasing rate, in order not only to keep it growing, but also just to keep it stable. As soon as the supply of new money runs dry, people’s willingness or ability to borrow more slows, or their ability to service this debt diminishes, then the whole economic miracle collapses. Anyway, all these sage-like prophecies apparently foretell unprecedented good for us, the residents of the UAE, because property prices — already a cause of some concern to most earthbound members of our community — are seemingly the yardstick by which we must measure our own and the country’s well being. The same biased and self-centred notion of what constitutes good reappears everywhere. If inflation is and was the pet hate of every country from post-Thatcherite Britain to pre-Stalin Russia, then why are perpetually rising house prices seen as the sign of a healthy economy? The answer is that they are not, other than to keep an army of self-interest in the financial community surrounding the property industry in the style to which they have become accustomed. In Britain we talk about the property ladder as the crucial pathway to success. Old hands at the game whisper to young aspirants through furrowed brows, “I’m sure you’ll get on the property ladder soon”, implying that to avoid the ladder is as unlucky as walking beneath one. The unmentionable truth behind all this is that a constantly upward spiral in house prices impoverishes rich and poor alike. Rising equity may give homeowners a sense of increasing wealth, but all that most of us have at the end of the process is an object that we need, a house, which we can exchange only for another, equally expensive house. The real winners in this process are the professional developers and speculators who make cash purchases of large numbers of properties, frequently on margin. The rest of us only discover the injustices of the market when we sell. But the market is the one thing that the scribblers and salespeople can never be open about. It must never be seen for what it is — an unhealthy cauldron of public-relations hype, guesswork and group-think. It’s essential for it to be seen as rational and predictable, an identifiable entity to which the various partisan interests (mortgage lenders, estate agents) can bring their ‘professional’ expertise. Stephen Corley is a business consultant with experience in fund and asset management. He can be contacted at corley@emirates.net.ae||**||

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