Many readers have commented in recent weeks to my column by stating that Dubai’s real estate sector is similar to that of Japan, where asset deflation took hold in the early 1990s. And despite fiscal and monetary stimulus policies being implemented, did not lead to a revival for the better part of two decades.
They have pointed to similar price patterns emerging in Dubai, and have concluded that the correction has a long way to go before we see light at the end of the tunnel. While this analysis may seem compelling, it is ultimately tautological for the very premises that it ignores.
Japan’s problems in the early 1990s were a combination of demography, tight lending policies, and oversupply. When monetary policies were relaxed, it created conditions for a continued construction boom, that ultimately exacerbated the oversupply problem, leading to a classic Catch-22 situation.
Oversupply emerges in a sector when capacity gets ahead of demand, either due to a mis-allocation of resources (conditions that feed the bubble) and/or a drop off in demand that may occur for endogenous and/or exogenous reasons. In Japan, as the population started ageing, expectations of future capital gains started to erode, as conservatism set in (a rise in liquidity preference that occurs every time there is a recession).
These expectations hardened despite fiscal and monetary stimulus, because government authorities did not address the problem of demographics. Making labour markets more competitive meant a whole suite of reforms that included equal access to jobs for men and women, as well as for immigrants, something that the Japanese regulators could not achieve.
Instead, the focus on monetary and fiscal policies meant that the same framework was being tinkered on at the margin, which nullified the efficacy of the policy and failed to address the structural issues underneath.
In the UAE, fiscal stimulus has been accompanied with reforms that seek to rewrite the rules of market access, thereby equalising market opportunity for residents and foreigners alike. In reducing costs of doing business, as well as by liberalising long standing immigration laws, the emphasis has been to distinguish between capital and wealth.
Only the former leads to non-zero sum game outcomes, whereby the economy benefits. These reforms attempt to achieve the twin objectives of enhancing demand by attracting foreign capital and people, as well as increasing the effectiveness of the domestic labour force by loosening restrictions on factors such as part-time work, allowing work from home, enabling foreigners to have access to long-term permanent resident visas and the like.
Inequality is exacerbated by power, and the challenge has always been to correct for these deviations that occur in the market economy from the competitive paradigm. This is not just economic power, but also legal power, which has been overhauled to account for the knowledge economy and its impact on consumer finance, health care, property rights (including those of OA (owners association) managers), etc.
Every sector has been engulfed in a revolution, and it does not take a rocket scientist to figure out that the solutions that have to be put into place are nothing short of extraordinary.
Optimism is in short supply in the real estate sector these days. This sense of anxiety is transfixed on the downside risks, ignoring the illuminating factor of reforms that are underway, as well as the spurious nature of comparisons to other economies that have failed to address the root causes of their problem.
Comingled in their analysis is the bias that creeps in; this speaks to the “expectations hypothesis” that is rooted in economic theory. In the final analysis, it is the role of expectations that play a pivotal role in the economy.
On one side are the cynics, who point to false comparisons and disruptive economic forces at play. On the other are the ones that have recognised that the rules at play in the UAE have fundamentally changed.
In the new landscape, the equalisation of opportunity challenges the status quo. It is this challenge that has addressed the structural factors.
The size and scale of these changes will play out over time, but they appeal to the global interconnectedness that are part and parcel of our daily lives. These changes go against short termism that was part of the old mindset.
The fact that at base, these new laws have become reality is where the springwell of optimism should flow from.
Sameer Lakhani is Managing Director at Global Capital Partners.