There is that remark of Engels to Marx: “Quantity changes quality”. Implicit in that statement is an assumption that more of one implies less of the other.
We wonder about that statement in the context of 2020, with all the talk regarding oversupply of real estate, the amount of stimulus added to the economy, of businesses closed or jobs lost, new opportunities created, and the quantum of profit that must be made for further losses to be avoided.
If there are too many houses for sale (or being built), then prices will drop. If people are losing jobs, then it will only exacerbate the situation. If there is not enough money in the system by way of stimulus, businesses will fail causing demand to fall further.
Everything in economics (some would argue the same for life) is predicated on the quantity-quality tradeoff.
But not just quality
Then we run into counter examples where plentiful supply does not affect either quality or demand. The rise of affordable housing was met with tepid demand, mainly because end-users were complaining about quality-of-build issues.
But we know the data doesn’t support this. Build quality has systematically improved in the city, yet the paradigm shift of COVID-19 entailed a rise in demand for more space. And for “suburbia” as work-from-home took over.
We have other examples where an increase in quantity is actually beneficial (increased competition that increases quality per unit of price). These are examples of Cauchy (non-Gaussian) data, where thicker tails allow for more outlier events.
This is the world we live in. But in this landscape, extremely large values distort signals, sending us down alleys that serve to distract. The rotten apple property stems from working not with measurement errors but with squared errors, which exaggerate extreme data even as it minimize observed errors in a tautological framework.
To put it simply, in the current downcycle, the increased frequency of stalled projects coincides with increased transactional volumes even as prices decline. Stalled projects indicate a lack of liquidity as well as an opportunity to capitalize from these opportunities (facilitated by recent changes in the legal framework that deals with such cases).
Increased transactional volumes indicate an increase in buying appetite, which is what analysts focus on, overlooking rental and price declines. This leads to the statistical surprise, which is that the absolute error of the data does not provide one with adequate insight into such complex systems.
In statistics, this is referred to as the breakdown point, which measures the largest proposition of data outliers a statistic can endure before it ceases to provide value in a formal sense of producing large deviations.
In many ways, the analytical tools used to compute price performance data in real estate have gone past this point. But it misses the broader perspective, which is the goal of growth. And the only silver bullet that was ever needed in the repertoire to lift society from its bootstraps.
Back to basics?
So where does that leave us? The clincher is going back to first principles and the foundation of perfect competition, aligned with the Keynes’ dark forces of time and ignorance that cloud the future.
We need more - more houses and apartments, more stimulus, more data and analysts that serve to scrutinize the data. More listed companies in ever more sectors, with more protection from the government against large deviations.
More competition amongst enterprises and government departments. More government oversight such that consumers are protected and - ultimately - more choice such that the power truly remains in the hands of the consumer.
This will act as a catalyst for growth and serve as fuel for reducing the inequalities that stem from Black Swan events such as COVID-19. As we look forward to the Expo, it serves us well to address the future by looking back at how we got here.
Dubai’s relentless pursuit of perfection has always implied an increasing population base. For that to sustain itself, the only way is for there to be an increasing multitude of people competing continuously, such that overall efficiency, productivity, and output rise.
Engels was right in his statement, but not in the way he thought.
- Sameer Lakhani is Managing Director at Global Capital Partners.