Business | Property
Still onspin cycle
Property markets are cyclic; they always recover. But when will the current clean-up come to an end? asks Peter Cooper
- Peter Cooper; freelance writer; Freehold Weekly
- Published: 00:00 October 15, 2009
- Image Credit: Supplied
Are there any lessons we can learn from previous UK housing crashes that are relevant to understanding the Dubai house price crash of the past year? A previous column comparing the Dubai real estate outlook with the Hong Kong post-1997 crash received considerable feedback. Such historical parallels are interesting and useful, but are never identical reruns of a previous scenario. As Mark Twain once noted, history might not repeat itself, but it does rhyme.
The jury is still out on UK house prices since the market started to fall in late summer 2007. There has been a rebound in prices over the past few months that some herald as a recovery, and others think of as a blip on the way down.
So, for a previous certified UK housing crash you need to turn the pages of history back to late 1990, almost two decades ago. Then, the tax advantages for couples buying property together expired, and so the 1980s property boom of Margaret Thatcher's era crashed.
The initial downturn was considerably worsened by the decision of John Major's government to keep the value of sterling up with high interest rates. The pound was following the Deutschmark within the European Exchange Rate Mechanism (ERM) and this took mortgage rates from 7 per cent to q0 per cent and finally a climactic 15 per cent in the late autumn of 1992. After that, the pound abandoned the ERM and interest rates fell back. And with a time lag of a few months property prices finally began to revive, albeit from levels 30-40 per cent below the peak prices of 1990.
Credit squeeze
If we look back to Dubai last September we can see that the global credit crunch was the immediate cause of the crash, and with prices down 50 per cent before a very modest recovery over the summer there should be no argument now about calling this a crash. As we have seen in the case of the UK between 1990 and 1993, it was a squeeze on credit that brought the boom to a sudden end. In a boom credit terms gradually get easier, interest rates decline, banks pay less attention to due diligence and loan-to-value ratios increase. It is a self-fulfilling cycle as rising house prices make banks more and more comfortable with lending.
In the case of the recent Dubai boom, the big borrowers were the developers, dominated by those owned or controlled by the government and, to a lesser extent, private individuals buying and developing property.
It was somewhat different in the late 1980s UK boom, with more private developers and more lending to individuals for secondary property deals. But these private developers also got themselves deep into debt and subsequently many went bankrupt and banks ended up with huge amounts of bad debt. Yet, arguably, it was the homebuyers who suffered most due to high mortgage payments, and many of them lost their homes in bank repossessions.
When the money ran out
Because the Dubai property crash is barely a year old it is hard to say if it will follow the three-year down phase pattern seen in the UK in the early 1990s.
There are clearly some marked differences between a developed property market like the UK back then and an emerging newly established property market like Dubai today. For one thing, until recently almost the whole of the Dubai inventory was sold off-plan, and therefore the secondary market has not been as important. The UK in the early 1990s had pockets of oversupply such as the London Docklands, but very few sites actually stopped work.
In Dubai, the way real estate was sold off-plan for a large number of developments all at the same time and with only a small deposit required has left a legacy of perhaps a hundred or more abandoned construction sites. The money ran out and so did the builders.
In the best case scenario investors have been offered alternative apartments or offices in completed or nearly completed projects. In the worst cases they appear to have very little chance of getting their money back.
Investor confidence
Does this make the recovery prospects for Dubai real estate better or worse than in the UK in the early '90s? On the one hand, the potential oversupply of property in Dubai has been reduced by the sudden abandonment of projects.
On the other, this does little to instil investor confidence, and there is still the worry about the new supply of property that is actually being completed.
Then again, all crises have their darkest hour. In 1991 this writer was unfortunate enough to be the business editor of the leading publication in the UK construction sector, and to say that the business outlook was very bleak is a considerable understatement. But things did get better in the end. Not all of the business people I knew during the boom survived with their business interests intact, a few companies vanished altogether. Shareholders and the banks also took a beating. However, the market did eventually recover.
In March 1993 I bought a house in the London Docklands. Several of my colleagues declared me insane, and it became something of an office joke. That house was, of course, my best investment ever.
Lessons from the UK experience
So if there is a lesson to draw from the UK housing crash of the early 1990s, it is that there is a dawn after the darkest hour. Will it take another one or two years for property values to bottom out in Dubai as it did in the UK then? It is impossible to tell.
But whatever the supply and demand position is, there will be a market bottom. There always is. After that, market forces reverse direction: demand starts to improve and supply is constrained by the effects of the crash.
This happens in both developed and emerging markets, although emerging market cycles will always tend to be more exaggerated due to their immaturity.
The laws of economics cannot be repealed or amended. They are what they are. Therefore, from the UK's experience of its housing crash in the early 1990s it is fair to conclude that market forces will produce an excellent entry point to buy in Dubai at very advantageous prices, but that this point could still be a couple of years away, even if the worst of the house price falls are behind us.
* Peter Cooper is the author of Opportunity Dubai, available at local bookstores.
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