The Circle Game

magic-roundaboutThe following article was written over nine years ago and serves to show the cyclical nature of Dubai’s economy.

Looking beyond short-term gains

By Tim Howe, Special to Gulf News
Published: 12:00 April 17, 2005

There is no doubt that greed and ignorance continue to be factors that will affect the fortunes of Gulf-based investors. A check on various segments within the local economy bears witness to what can best be described as a feeding frenzy.

Just look at the price of freehold property and rentals. Again it would appear that landlords are really skimming the cream so that their short-term gains may result in long-term losses and not only for themselves. Dubai will lose its competitive edge if rentals and other associated costs continue to escalate at current levels.

In the global market place, business tends to gravitate to where costs are lower and if Dubai’s employment rates continue to climb upwards then some international business organisations may consider pastures new.

Even developers are jumping on the bandwagon whether it be delivering to customers a finished product that may be inferior / smaller than what had been promised or excessive hikes in service / maintenance charges. This sort of behaviour may prove beneficial at a micro level but could have a negative impact on the macro economic development in the longer term.

Too many people are investing in the real estate market, solely to speculate. This leads to a skewing in the balance of buyer occupier / buyer speculator ratio followed by the inevitable bubble. Economic history is strewn with examples of what happens when a bubble bursts. Everybody wants to double their investment even before the ink has dried on the sales contract and obviously there is no way that this can continue ad infinitum.

Gulf stock market investors seem to have forgotten what happened to the dotcom market barely five years ago. Some fortunes were made then but a lot more were lost mainly through the twin forces of investor greed and ignorance.

Further, hoteliers are raking in extraordinary revenue, what with their rates, occupancy levels and returns that could only be imagined some two years ago. The end result is that there is a chance that Dubai will price itself out of the global tourism market. If the visitor considers Dubai an expensive place then there are always alternatives elsewhere.

Not to be outdone, the educational institutions are also jumping on the bandwagon with school fees continuing to escalate at an alarming rate.

Recent weeks have seen the reporting season for both petroleum-related companies and banks. Some would consider that in many cases profits reported have been obscenely high. It does not take a Rhodes scholar to work out who ultimately pays – the customer.

Economists may argue that these are typical textbook cases of the Law of Supply and Demand in action. As demand rises in the short-term, prices will do likewise until the increased demand is satisfied by an increase in supply with the market returning to equilibrium. By this time, however, the damage to the economy may have already taken place.

It is about time that all consider the impact that greed will have on the local economy. The quest for a quick dirham now will inevitably harm the longer term future of Dubai. The storm clouds are beginning to appear and all involved should be aware of the possible consequences of becoming too greedy.

The only differences between 2005 and 2014 can be seen form the following table:

19 June 2005

19 June 2014

DFM General Index

5987

4593

Arabtec

US$

0.43

1.19

Emaar Properties

US$

8.95

2.51

Gold

US$

437.50

1,315.50

Oil

US$

59.18

110.26

Otherwise Dubai illustrates so well what Joni Mitchell meant when she sang that you go round and round and round in the Circle Game.

Advertisements
This entry was posted in Finance and tagged , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s