About a year ago and bit more, I had a deep inclination towards a stock market crash in the Gulf.
About a year ago and bit more, I had a deep inclination towards a stock market crash in the Gulf. And as the saying goes, “put your money where your mouth is,” I withdrew any major positions I had in the whole Gulf stock market in April/May of 2005. True to form, the stock markets rose and rose and my detractors kept on rubbing this fact in my face. But I was undeterred because of a few factors I had learned when I got my university degree. First, if something is too good to be true, it is too good to be true. Second, all things that go up at a step inclination, will fall at the same degree it went up. And Third, and this is the most important factor for me, there was no basis for this run up other then greed and speculation fueled by greed. All good factors for a crash are waiting to happen.
For the few friends who did listen to me at the time, they were inquisitive but failed to head my advice because everything was too good for it not to be taken advantage of. Like a drug, the user can’t see the long term effects but revels in the good times. And like an addict, he tricks himself into thinking that he can stop wherever he wants to. But believe me, nothing is more addictive than greed.
A few points I asked my friends to consider at the time:
1- The P/E ratios of the overall markets in the Gulf were about the 40s. An average, stable but growing P/E ratio for any good market should be between 12-18. That meant that true Gulf markets would have to lose between half to two thirds their values to reach this point.
2- The Dubai and Saudi, these were the two markets I properly followed, had an index high of 1200 and 20,000 respectively around the last quarter of 2005 in the case of Dubai and beginning quarter of 2006 in the case of Saudi market index. Both were too high and too fast for their own good.
3- My uncle, an elderly conservative gentleman, was gung-ho about the local stock markets over the stable and mature global ones. A most unusual act for someone who believes that it is better to be safe than sorry. I was sure that if he did it, so did many other business leaders of the area. Again, this could not be a good scenario for the investor.
My prediction came true as both markets lost over two thirds of their values by mid this year. My time factor was a bit off, but what I guessed would happen, did happen.
The Dubai stock market index fell from about 1200 to less than 400 but has now rebounded to the mid 400. While the Saudi market index fell from over 20,000 to about 7,000 before rebounding now to about 11,000. By any measure a crash but yet we still call it a correction.
So what has this to do with the property crash I am predicting now? Well, everything.
During the great stock market boom, many people could only access capital by hocking property. The banks, in their wisdom, gave people, at times even, a ten to one ratio of debt. That meant for every Dhs 1 you, the investor put up, the bank would loan you Dhs 10. Now multiply this by millions and you can immediately see the effect on the property market when the stock market crashed.
In addition to this, because there was a similar rise in property prices fuelled by get-rich-quick schemes, people plowed huge sums in to these untested, financially speaking, markets. Because our laws are not keeping up the pace of the marketing of these properties, cowboys here come in to these markets promising the moon in one hand and the sun in the other and this lead to the same key factor that fuelled the stock market—greed. And like the key factor that broke the stock market’s proverbial back, fear will do the same to this market. The issue is more of when rather than if.
This is not to say that all properties will be affected with similar magnitudes of correction. Areas where rational growth had taken place will keep their overall value. Areas of irrational value growth will be the area that will face the brunt of this decline.
For me, key factor that indicates a problem in the city is when the British expatriates complain about the cost of living. I am not singling them for any other reason than the fact that they are usually the privileged expatriate community and, last I checked, made up over 10% of the overall community within Dubai alone. If they complain, what chance do the non-British expatriates have considering that over 70% of the expats are sub-continent laborers?
Property prices have jumped over 1000% over the last 3 year period in some places of Dubai. Can you name a place in the world where such a growth has happened without a crash following it soon? I can not!
The issue here is time. I have no solid idea as to the exact time this will happen but it will...and sooner than you would expect.
This is not the government’s fault as some people have said because it did not curb people’s greed. You can’t curb greed. This is a natural economic process that will happen and many will be hurt. But for those who plan ahead, things will be better for them. For those who just gripe, they will not succeed.
The question you should ask yourself is, “What is my next step?”