There is so much to be gained from economy history … it is indeed a shame so little is taught to budding economists, journalists and analysts. History may not repeat itself but it is a brilliant way of highlighting issues modern day economists have, foolishly, brushed to one side.
As we look at analogous events to the development of the Dubai real estate market, one of the examples that keeps cropping up is that of Berlin. Although considered to be a Tier 1 city in terms of development, it faced two sets of challenges over the last 50 years that made it an outlier of Europe.
It is these that need to be scrutinised to understand some of the dynamics of the Dubai property market.
Berlin, in particular, and Germany as a whole have historically suffered from low home ownership rates. Whilst this could be explained easily in the immediate years after the war, the 41 per cent has persisted, indicating that despite developed mortgage markets and high levels of immigration, home ownership has remained flat at lower levels, especially when compared to rest of Europe.
This rate of ownership meant that even as housing stock rose at substantial levels in the 1950-60s, there was no active end-user increase in ownership rates. Apart from the government sector, most of the financing was done by private banks and institutional holdings. And even though rents remained broadly flat during the decade, money flows into the sector experienced a surge, even as house prices rose by moderate levels (less than 4 per cent per annum during this period).
The second experience has been that despite the fall of the Berlin Wall, and the increase in economic growth rates since, house prices have broadly remained flat. And in certain cases have declined, a phenomena that was apparent well before the global housing crisis in 2008.
In point of fact, the housing crisis left Berlin largely unaffected; in certain areas prices actually rose between 2008-10. This indicates that housing markets have at times unhinged themselves from underlying economic growth rates.
Despite a huge build up of housing stock, pries in Berlin continued to rise, albeit at rates that were in the low single-digits. What was critical in the data even then was that price indices were constructed not only through secondary market performance but imputed using primary mortgage activity data to arrive at a holistic view.
Curiously, this discipline has not been adopted by industry watchers in Dubai. Instead there has been this artificial distinction between primary and secondary market activity, leading to distortions in price signals due to poorly constructed methodology of indices. Accounting for off-plan data is the only logical conclusion where more than half of the market activity is dominated by that sector.
Just as it made sense in Germany when there was a massive rebuilding effort post the war. Information that is not statistically accurate then serves as a model for the market’s micro-structure efficiency. This has been noticed by sophisticated investors, but for the most part it continues to be ignored by analysts and the media. The second and perhaps the more critical lesson is that evidence from Berlin suggests that a weak economy is not necessarily associated with a falling housing market. Just as a healthy economy is not necessarily associated with a thriving one.
This is especially true if the subsets of the economy that drive asset markets are different from those that drive consumer sentiment. Given low home ownership rates in Berlin, even though economic growth rates were low between 1955-65, house prices rose even as there were rent control programmes in place in most areas.
This suggests new money flows from investors were actually generating lower yields. Similarly, even as the global housing market crisis swept through in 2008-10, Germany — and Berlin — housing prices moved in the opposite direction. This implies that local forces of demographics, money flows, and government policy often affect house price dynamics more strongly than do external economic and geopolitical factors over time.
Unfortunately, this lesson often gets lost in the razzmatazz of instant and often misleading news. Equally, it is a lesson that needs to be well heeded by the patient investor.
The writer is Managing Director of Global Capital Partners.
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