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article imageOp-Ed: The vicious spiral of greed

By FC Kaw     Dec 8, 2008 in Business
Does the fairytale of property investment in Dubai still exist? How has it progressed? Can you still make any money out of it?
Imagine this scenario. You build houses and apartments, and suddenly the government decides to open up the country and encourage massive growth. Excellent news for you, so you keep building more and more houses and apartments, keep charging more and more for them, people keep coming, demand keeps growing and you begin to invent new ways to make even more money. Why not charge for parking spaces, charge people for the right to sell their property, evict people who are paying low rents because 'you need the house for your family' and then promptly rent it out again at a much higher figure, get the government to make it illegal for more than one family to share so the other family have to rent separately. You get the picture!
Now the market changes, almost overnight, demand crashes, people lose their jobs, lots are forced to go home, rent cheques begins to bounce at a faster and faster rate. In any normal economy market forces would dictate that rents and purchase prices would drop at equal rates, so why have only purchase prices dropped in Dubai so far?
The answer is in the headline of this article. People have borrowed so heavily to buy more and more properties to rent out that they cannot afford to drop the rents, and to add to this, the banks who all charged into the market to lend more and more have found their bad debts growing so are having to increase interest rates. When the rest of the world are dropping theirs.
This is a very difficult spiral to break. Even if the banks are able to repossess a lot of the properties, what can they do with them? Where will buyers come from, especially as the same banks do not want to lend against property?
Eventually, some owners will crack and rents will then start to spiral downwards and that will then lead to an increase in defaults on purchase loans and more repossessions. This game is nowhere near the end yet.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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