In a cooling housing market, existing property owners as well as developers get nervous, impacting the level of future investment in the sector. Falling housing prices deter potential investors from making further investments as Keynes’ dark forces of “time and ignorance” cloud the future.
The result is a housing market that is affordable, but one where future investment levels are curtailed as focus shifts to disposing off existing inventory. The dilemma is equally acute at the opposite end of the spectrum, one where galloping prices fuel further investment as investors and speculators rush into the ecosystem to capitalise on short-term gains.
But this comes at the expense of affordability, for both tenants and prospective home buyers, who are increasingly “priced out” of the market.
We are in an ecosystem where housing is viewed as a “financial” product, a sure-fire mechanism for generating wealth. This is partly based on the history of real estate prices, especially since the advent of the freehold phenomena.
Left to their own devices, prices will “over” correct both on the upside as well as downside, but this price volatility comes at a cost to the economy and investor sentiment. The key question therefore becomes whether any government intervention can smoothen out these price fluctuations.
Intervention takes many forms
When markets are running away on the upside, it is normal for rental caps and lending curbs to be enforced in order to temper price rises. Conversely, in times of price downturns, some of these curbs can be relaxed to avoid exaggerated price falls. There is no science to these impulses; it is a response to the emergent behaviour on the ground that determines both the policy response as well as its efficacy.
However, the narrative that accompanies these cycles become as instrumental in determining prices as do the policy actions themselves. Currently, the “oversupply” narrative dominates the discourse, and this itself serves as a deterrent for future investment. It is important to distinguish here what the types of oversupply are.
Technical oversupply is due to economic sluggishness, accompanied by a reluctance to invest and thus leading to price and rental declines as buyers and tenants acquire increasing bargaining power. Economic oversupply is more fundamental and corrosive in nature, and occurs in an environment of declining and/or ageing populations, where affordability conditions are not being achieved.
In both cases, prices decline, but the drivers behind these forces are completely different and demand different policy prescriptions.
In Dubai, both the population and per capita income levels are rising (albeit at more modest rates), suggesting that the market microstructure forces are more at cause with factors like size, location, mortgage accessibility and payment plans being the variables that need focusing on. Rather than more macroeconomic factors such as overall affordability of the community.
This suggests that at the private sector level, product offerings must be curated towards meeting the needs of the emerging and changing buyer. Developers who have achieved this tasted success in terms of moving their product, even though margins may have adjusted lower.
We see this in the transactional data, as volumes have risen this year, suggesting that the demand for the “right” product remains vibrant. In this scenario, policy prescription is skewed towards providing liquidity for projects that need to be revived. On terms that ensure viable completion, as well as ensure that future project launches have the requisite level of financial resources available.
A freeze comes with costs
That, rather than a blanket supply freeze, which will only serve to ratchet prices higher, and lose the objective of overall affordability. Efforts to incentivise developers (including measures to ensure that there is no unnecessary duplication of projects) become case- and/or sector-specific.
This balances the twin forces of affordability at the demand level, and generate investment at the supply level to achieve sustainable growth. This undoubtedly implies that house prices have to rise over time, but the pace and volatility of these movements then become the key criteria for evaluating policy success. (For instance, price rises over time are in lock step with income levels).
Exogenous economic shocks pose challenges to this objective on a continual basis, implying that there will always be some level of price volatility and uncertainty. However, regulatory regimes that have been relatively more successful are the ones able to exert greater influence in guiding the pace of this volatility.
Despite the oversupply narrative, Dubai remains a viable destination for global real estate investment. This is evidenced by gradual price rises in areas as diverse as Palm Jumeirah to International City, where a new breed of buyers have entered recognising opportunity.
In the final analysis, data speaks volumes, and initiatives undertaken by the Land Department (including the launch of a new price index) will reflect the dynamics on the ground, increasing transparency and investor confidence in the months ahead.
Sameer Lakhani is Managing Director at Global Capital Partners.