You can’t have it both ways. You cannot have a regulatory framework that protects asset holders whenever prices fall and, at the same time, perpetuate an economic system that makes things more affordable for the small investor through regulatory moves.
The two are simply in conflict ... and any attempt to prove otherwise is simply disingenuous. This does not imply that I am against government intervention. In point of fact, intervention has been a frequent characteristic in the world economy, but we need to define the objectives clearly.
A regulatory framework has multiple objectives to overcome, but in an economic analysis, has the effect of reducing costs for the end-user. This is often offset by the costs imposed by government regulation. We then operate in a world of trade-offs where the objective is that society benefits on a net basis.
Some market observers argue that a natural equilibrium is something that all economies will reach. But they also artfully switch the debate to rail against the practices of industry observers and their inability to capture accurately the dynamics of the real estate market. They call for regulatory oversight for these so called industry observers.
One of their suggestions include a “holistic regulatory oversight committee” that reaches across disciplines. I am not an expert in real estate matters nor in forming regulatory committees, but this line of thinking is not new. It fundamentally boils down to the pace of regulatory reforms, the constituents that they are aimed at, and the balance sought to be achieved between economic growth and social stability.
This is an all too human endeavour ... sometimes we succeed and sometimes we need more work against the backdrop of a world that is changing rapidly. In establishing Rera (Real Estate Regulatory Agency), for example, Dubai has put in place a model blueprint for regulating the free wheeling practices of the real estate industry. India has already adopted a similar model, and others such as Egypt, China and Pakistan are examining their own legislation with a view to introducing a similar framework.
In other areas like telecom deregulation, more work needs to be done, as articulated by other legal and economic experts in the field. Through a series of feedback loops, both from within the industry as well as from external observers, we know we have succeeded most often through the “price mechanism”.
For example, there were a number of concerns expressed about the volatility and the pace of rental increases in the real estate market in the first cycle. This concern has now been obviated through rental regulatory practices that have been put into place, to the point where some argue that this is no longer needed.
I have never argued that more cannot be done. As new practices are introduced — through innovation, which is the hallmark of private enterprise — the role of the regulator is to forever be the gatekeeper, protecting against any attempt at “price gouging” or other anti-competitive behaviours. In codifying this doctrine, the role becomes one where the function of price signals becomes critical.
This implies that price volatility becomes the natural consequence of an asset-driven economy. Regulating against the movement of asset prices simply means that the interest of asset owners are given precedence over that of the small investor, which is simply against the raison d’etre of regulation.
No amount of regulation can do away with economic boom-bust cycles. Instead the focus should remain one where the competitive framework of the economy is increasing. It can only do so if the starting point of regulation is a reduction of costs for the operation of enterprise.
Affordability then becomes the key lens with which to view the success — or lack thereof — of regulation.
Nasser Malalla Ghanem is Senior Partner at NM Associates, which has a joint venture with GCP.
