The 7% Solution (3)

Predictably, since the Rent Freeze of 2007, rental prices for new tenants in Dubai have gone up by at least 5%, and sale prices for existing freehold properties are down by about 5% from before the freeze. (This decline is a first, after more than a year during which the prices of freehold properties increased by almost 5% a month.)

In a normal real estate market, values are determined by rents (including owner occupied homes, since, if rents are very low compared with buying, most people will rent, until the cost of buying aligns with the cost of renting). Also, in a 'normal' market, most investors purchase with borrowed money, so, if a rental property sits vacant, the investor can't make the payments and the property is foreclosed and sold at auction.

Here, however, the enlightened policy of the West–i.e., randomly confiscating money from Middle Eastern accounts–has many Middle Eastern investors reluctant to invest outside the region, so some of the $70 a barrel oil money was used to buy Dubai property for cash, as a safe place to park the money. There is no pressure on these properties from lenders, and, as long as prices were going up 5% a month, there was a good return, even on vacant properties.

Oil is now trading below $60, and the Dubai freehold properties are going down 5% a month.

Will this lead to a collapse in prices? Or will people figure (for now) that a single month's 5% decline must be weighed against more than a year of 5% increases?