The short article below appeared in NYTimes describing how things turned for the real estate market in Dubai. At the height of the property bubble, nobody can imagine it can come to this - property in Dubai had been rising for years and it was the place of choice to work, find money and start businesses for many foreigners who went there. Dubai, however, is not unique.
A few weeks ago, you may have caught this piece of news : Irish bank bailout to cost US$60B (S$77B) [Link]. I checked and found the population of Ireland is 4+M so the size of this bailout is quite staggering. Ireland had a property bubble which collapsed ahead of the subprime crisis in US. Before the bubble burst, Ireland was often called the Celtic Tiger[Link] (hmmm...remember Asian Tigers[Link]) for its strong economy. After the political problems (Protestants vs Catholics) were solved, the Irish economy boomed from 1995-2007. The leaders of Ireland were seen as being highly competent technocrats that transformed one of Europe's poorest countries to become one of the wealthiest. In 2006, nobody can imagine the trouble its economy will be in today. But the trouble in Ireland is not due to massive govt incompetence or fraud, it was as simple as having a property market that became too hot and falling sharply - perhaps one can argue the govt was incompetent by doing nothing and just standing by as property prices rose.
A few days ago, it was reported that a HUDC flat in Bishan was sold for $1.1M[Link]. I think Singaporeans who are so used to high property prices are only mildly alarmed by this transaction but this perhaps one of the most expensive, if not the most expensive, public housing transaction in the world. People often argue that these prices are okay because Singaporeans can afford it and are used to it. I'm sure that in Ireland, Dubai or US, when someone bought a property during the property bubble, that person can also "afford it" at that point in time. If the banks are willing to lend and you can service the loan, you can afford it. I was crossing a small road to get to Tampines Interchange yesterday and saw a notice put on the railing of the road divider by a property agent - China couple wants to buy your flat, urgent purchase. There is this belief among property agents whom I've spoken to that the immigration wave will keep prices high in Singapore. After much public outcry over the surge in property prices, the govt finally stepped in last month with cooling measures to keep speculation under control - these measures have managed to slow the rate of price rise - but they were put in place after many months of denial that there was any problem here. Some suspect that they only did it because elections have to be held soon.
In Nov 2009, Mercer came out with a report to say the CPF scheme is inadequate for retirement[Link]. Studies show that an average person will retire on between 8-26% of his last draw salary vs >50% for retirees in other developed countries[Link]. The PAP govt explanation of this situation is that property has to be counted in measures of adequacy. This is strange because in apples for apples comparison, you cannot add something that is not added in other countries. But it just shows how persistently high property prices relative to income has basically sucked in funds that can be used for other things like retirement and disposal income for consumption. In short much 'wealth' is locked up in property and because of high property prices, Singaporeans enjoy a comparatively lower quality of life.
The high dependence on property as a means of retirement and store of wealth is risky. We have seen how property prices can tumble for more than 2 decades in Japan and the damage left behind when high property prices tumble in Ireland, Spain, USA, UK and Dubai. It is one thing to make honest mistakes due to unforeseeable events but another not to learn from the painful lessons of others especially when the mistake is repeated so many times.
Real Estate Collapse Spells Havoc in Dubai
LIZ ALDERMAN, On Thursday October 7, 2010, 4:44 am EDT
DUBAI — On a sultry June evening in 2007, more than 100 people camped out at the offices of Emaar, a prestigious Dubai property developer, to ensure that they would land a coveted spot in a gleaming new skyscraper scheduled to open this year near the Burj Khalifa, the world’s tallest building.
Today, the property, designed by the New York architect Frank Williams (who died in February), is like a number of others around Dubai — little more than a rotting foundation. Its value has plunged by more than 40 percent since 2008, after the collapse of Dubai’s real estate boom.
“It’s really a disaster, the situation in Dubai,” said Silvia Turrin, a real estate agent who bought into the property, 29 Boulevard, and has been unable to get her money out. “It’s not like in Western countries. It’s very difficult to exit here if there’s a problem. And we’ll never get our money back, but now we’re stuck dealing with this hole.”
Dubai lured people to a gold rush in properties at the height of its real estate boom — including business and political leaders from Afghanistan who invested the deposits from Kabul Bank, one of the country’s largest. The near-collapse of the bank in September was largely a result.