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Real Estate Risks in the Middle East   Term Paper ID:42571 Click to get this paper

Essay Subject: This is a modification to a thesis on real estate risks in the Middle East.... More...

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Paper Introduction: The Real Estate Bubble in the Middle East and Its Associated Risks and Factors By Name This paper was submitted in partial fulfillment of the requirements for the degree of Master of Business Administration MBA At Maastricht School of Management MSM Maastricht the Netherlands Maastricht School of Management P O Box BE Maastricht The Netherlands Introduction BackgroundThe real estate risks currently prevalent in the Middle East include thoserelated to geopolitical events the global economic strain and theregion\'s real estate bubble characterized by Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. 13, no. How would you recommend that the near-rational model be used to give investors more time to adjust their investments so as to avoid the losses due to asset valuation crashing in a burst bubble? What solutions might be applied at the regional, national, and local levels to promote recovery from the real estate bubble when it bursts? Ineconomic terms, a "bubble" is "an asset price that has risen above thelevel justified by economic fundamentals, as measured by the discountedstream of expected future cash flows that will accrue to the owner of theasset" (Lansing, 2 7). Although EasternEurope's housing markets were once "sizzling," West Europeans have stoppedinvesting in properties in Warsaw and Estonia and "other former real estateKlondikes" (Landler, 2 8).Farther to the east in India and southern China, prices have stoppedclimbing, and stock markets are "down sharply after reaching heady levels,"so people have less cash to invest in real estate (Landler, 2 8). Purpose of the StudyThe research objective of the thesis is to identify the complex of issuesthat constitute real estate risks in the Middle East, particularly toexamine the real estate bubblesbubble in the Middle East and its associatedrisks and factors, and to clarify how these play into and are affected bythe global economy. Figures 1 and 2 illustratethe inverse proportionality of properties to mortgage amounts. Dubai's situation raises the risk that "a significant imbalance maydevelop over the next two years as scheduled new supply comes on to themarket" (Atkinson, 2 8). 14, no. Ghazalyasserted that "A bubble is where a majority of buyers are buying overpricedproperties and that is not happening," arguing that the average rate ofproperty appreciation, 15%, was what was being seen on average in mostareas" ("Is a real estate bubble looming?," 2 5). 5). In addition, Spain's property prices havedeclined by as much as 13% in some areas, and by March 2 8 there werealready 155 cases of homeowners defaulting on mortgage repayments -"halfthe total number of cases registered in the whole of last year" ("Greenspanbelieves Spain has 'bigger' real estate bubble," 2 8). A comparison between current levels and past levels that proved tobe unsustainable and led to a burst bubble can enable economists to make"an educated guess" as to whether a real estate market is in a bubble("Real estate bubble," 2 8). These are serious risks, and the real estate market in theMiddle East may well be in line for them in the near future. The problem is that there aremultiple factors impinging upon real estate risk in the region, and beforethe region can develop a roadmap for recapitalizing and realigning forrecovery, it must first identify the many forces that promote a bubble andother real estate risks and their connection to the global economy and toeach other. Thecausal-comparative method will be used to determine the causes of realestate bubbles and of the bubbles' bursting among several other countriesor regions. Omniyat Holdings' CEO, Mehdi Amjad, dismisses speculationon the bursting of Dubai's real estate bubble, stating, "There is no bubbleand I don't believe markets will see a sharp bust. A year ago, thebeginning of a bubble in Israel was noted by analyst Arik Mirovsky. The higher costs portend reduced profits for developers,possibly leading to further project cancellations, which likewise impactsgrowth negatively (Emerging Markets Monitor, 2 8).Egyptian investment bank EFG Hermes predicts that Dubai's currentpopulation will rise 1.4 million to nearly 1.9 million by 2 1 , estimatingthat the current demand for 45, to 5 , new units per year willescalate to 64, units in 2 8 and 68, units in 2 9, "clearlyoutstripping the expected rate of demand" (Emerging Markets Monitor, 2 8). The Bubble in KuwaitKuwait has not been exempt from the global real estate bubble. What can the Middle East learn from other countries that have experienced a burst real estate bubble? 2. 11, (June 19), p. 1, (Jan),p. Thearticle identifies Dubai as "the fastest growing city on the planet" andexplains that Dubai has "about $1 billion worth of projects underway orplanned for the [near] future" ("Real Estate Bubble in Dubai?" 2 8).NuWire Investor reports that since Dubai's real estate market opened up toforeign investors in 2 2, prices have gone up more than 2 % for single-family dwellings, a situation that NuWire contends could be "a result of arapidly growing city with an artificially depressed market closed toforeign ownership versus irrational exuberance in the Middle East's mostbusiness friendly climate" ("Real Estate Bubble in Dubai?" 2 8), As thearticle points out, "Real estate markets tend to go through booms and bustsas a result of new construction...[and] developers tend to overbuild whenthings have been going well and underbuild when things have been goingpoorly" ("Real Estate Bubble in Dubai?" 2 8).It must be noted that not everyone is in agreement that there actually is abubble in Dubai. This model presupposes that there will befluctuations but constrains irrational exuberance to manageable levels thatwill not precipitate the bursting of the bubble. 6, p. 3. Lansing (2 7) states that, "The dramatic rise inU.S. Then the data from the completed questionnaires will beanalyzed in conjunction with the baseline to arrive at insights into theMiddle East's total real estate risk, what it is comprised of, and why itis volatile. Moreover, Kuwait's real estate market infrastructure is somewhat "underdeveloped and fragmented" in that it has no real estate professional organizations that bring together the real estate profession (Kaganova, Al-Sultan, & Speakman, 2 5). 4. Data Analysis: An analysis of the data will be conducted and discussed, and the findings of the study will be presented. 11, (March 17), EbscoHost, viewed12 August 2 8,Emerging Markets Monitor, 2 6, 'GCC Real Estate Markets: What Goes Up...,'vol. stock prices during the late 199 s, followed similarly by U.S. 5. Amjad sees a couple of years of inflation in Dubaias "okay" but warns that "a decade of inflation is unhealthy," as the keyto Dubai's success is "long-term sustainability" ("Omniyat CEO," 2 8).Population growth is triggering new construction, and "The government isbuilding a city for five million people whereas today we have fewer thantwo," suggesting, according to Amjad, that "whatever is supplied now willnot be enough" ("Omniyat CEO," 2 8). A yearago, the beginning of a bubble in Israel was noted by analyst ArikMirovsky. The assessor to came to verify the propertyfor the Bank of Jerusalem valued the apartment at only $5 , , but thebuyer wanted the apartment anyway, even at an inflated price (Mirovsky,2 7). Parliament is in debates over "a series ofpopulist wage protection measures" intended to offset this, "the mostprominent being a planned TD5 ($43) increase in the monthly wage of allstate employees earning less than TD1 ($86 ) a month" ("Kuwait: RealEstate Losses," 2 8).By April 2 5, speculation that Kuwait might be entering a bubble was beingcountered by insistence that no bubble existed. The chapter will discussthe factors that precipitate and constitute a bubble, what economicindicators signal the development of and measure a bubble, what makes itvolatile, and why it is difficult to assess the existence, severity, orrelative danger of bursting of a real estate bubble. Other real estatebubbles will be examined as examples, but Mmore specifically, the chapterwill look at the current real estate bubble in the Middle East and thebubble in Kuwait, ending with a final look at the mechanisms of real estaterisk in the region.2.2 BackgroundAsset markets cycle through "boom-and-bust cycles" in which "speculationdrives prices 'excessively' upward until the bubble bursts and pricesplummet" (Belke & Wiedmann, 2 5). The price to income ratio is "the basicaffordability measure for housing in a given area," usually presented as"the ratio of median house prices to median familial disposable incomes,expressed as a percentage or as years of income" ("Real estate bubble,"2 8). 2.8 The Near-Rational Real Estate Bubble ModelThe near-rational real estate bubble model is adapted from Lansing's (2 7)near-rational stock bubble model. "I know," he replied, "but a completely outfittedapartment where I don't have to alter a thing is convenient for my trips toIsrael" (Mirovsky, 2 7). Is there a connection between the Middle East's real estate bubble and the global economy? Although the principle driver of inflation in cities such as Abu Dhabi and Dubai has been "the shortage of residential and commercial properties in the federation," the governments there have imposed a 7% rent increase cap in an effort to bring inflation under control (Robson, 2 7). The potential for an assetprice devaluation is of greatest concern, as it would "lead to a majorcontraction in consumption," and "the expected scenario of smooth economicgrowth would be sharply disrupted" (World Economic Forum, 2 7).In Kuwait, property sales fell sharply in July 2 8 as a result of newgovernment regulations imposed upon the real estate sector in an attempt tocurb inflation ("Kuwait Real Estate Losses," 2 8). Industrial and warehouse property transactions in Kuwait "consist of only warehouses and account for less than 1% of transacted value, while in the U.S. winter and changes in commodity markets led the International Energy Agency to revise its January forecast for global oil demand downward to 85.8 million barrels per day, a 16 , -barrel-per-day drop from the average in 2 6 (Robson, 2 7). If so, how? According to Arabian Business,international consultancy E.C. Although the warning signs are clear when the priceof houses has gone way above their true value, regulators are oftenreluctant to do anything that would disturb a booming housing business.The fourth factor is a precipitous decline in interest rates, whichencourages people to buy homes even if they cannot afford them (Grewal,2 8). Although OPEC cut production, "declining demand for oil appears to be a long-term trend," and "consumers are belatedly adjusting to high fuel prices that have lined the pockets of Gulf producers" (Robson, 2 7; Chart 4). The paper has identified geopolitical risk, historic highs in real estate prices and commodities, the role of foreign insurers in insuring real estate transactions that locals are unable to, the increasing size of mortgages, and the dearth of risk managers who might help the region better manage its risk. This liberalization begins a vicious cycle, in which availabilityof real estate loans drives up the demand for real estate, pushing priceseven higher (Hilbers, Lei, & Zacho, 2 1, p. Borrowing costs have risen sharply, and banks are hoarding their cash, while Russia closed its stock exchanges for two days in a row as its president "pledged a 5 billion ruble ($2 billion) injection into financial markets to stem a dizzying plummet in share prices-and quash fears of a repeat of the country's 1998 financial collapse" (Aversa, 2 8). Aprimary cause is "loose lending standards" that allow homebuyers who wouldnot normally qualify for a home loan to obtain one (Grewal, 2 8). Sample SelectionThe questionnaires will be distributed to Middle Eastern real estate,government, and economic authorities who can provide information germane tothe study. Hajaj predicts that land prices in those area will likely reach ashigh as $3 , (Mirovsky, 2 7). Recession in the United States is not beneficial to the Middle East's economy, either, as money-restricted Americans are conserving fuel and spending less to save on costs during the economic crisis. The farther thebubble expands, the greater the tension on the bubble, and the greater therisk that the bubble will burst. Such a burst bubble occurredin Japan in 199 , exerting a highly damaging effect on the Japanese economyand demonstrating the serious risks of a bubble economy and the mistakesthat contributed to the damage ("Real estate bubble," 2 8). or less, but in recent years has risen dramatically,especially in markets with severe public policy constraints on land anddevelopment" ("Real estate bubble," 2 8).Despite this variety of measures, accurately identifying a real estatebubble is difficult and takes time, as does predicting when the bubble willburst. Moreover, the crisis in the United States will undoubtedly affect the economy at the global level, as evidenced by the fact that "The Federal Reserve, and central banks in Europe, Canada and Asia, pumped as much as $18 billion into money markets on Thursday [September 18, 2 8] to combat shock waves from the worst financial upheaval since the Great Depression of the 193 s" (Aversa, 2 8). subprime market is experiencinga rash of foreclosures and tightening credit, and analysts are concernedthat this problem could spread from California and Florida, where theproblem is greatest, to other states (Landler, 2 8). In a rational bubble, "the stock pricemust grow faster than dividends (or cash flows) in perpetuity (Lansing,2 7).While rational bubble models assume that "investors always know the size ofthe bubble," in the real world, investors are more likely to predict atotal stock price's movement on just a single forecast (Lansing, 2 7). This allows extra timefor investors to scale their investments up or down as needed to takefullest advantage of the market without risking the loss of asset valuationin a burst bubble.2.9 QuestionnaireThis study used a questionnaire for eliciting insights on the Middle Eastreal estate bubble, its causes, and the synergistic effects of itsdifferent components. Herecounted that A Frenchman evinced interest in purchasing a Netanyaapartment that overlooked the sea, and the owner was asking $6 , forthe property (Mirovsky, 2 7). Literature Review: A review of the literature will be conducted to establish a baseline of the Middle Eastern real estate bubble, as well as bubbles that have arisen and burst in other regions of the world. 4-5, General OneFile,Gale, Apollo Library, viewed 18 September 2 8,.Sahici, E, Emlak, H 2 7, 'Foreigners buy $45 million in Turkish realestate shares,' Turkish Daily News, (Jan 3 ), viewed 18 September 2 8,.The Economist, 2 8, 'Lessons from a "lost decade,"' August 21, viewed 11January 2 9,.World Economic Forum 2 7, 'Middle East@Risk: A Global Risk NetworkBriefing,' viewed 18 September 2 8,. Investors abandontraditional metrics that provide realistic valuation of their assets,resulting in "the market's meteoric rise" (Lansing, 2 7). 7. 2.7 A Complex of Factors This paper's introduction and literature review have identified a complex of factors contributing to real estate risk in the Middle East and the formation of an asset bubble. Senior economist Kevin J. He pointed out that"This so-called boom in real estate is difficult to quantify," evincingdoubt as to how much of the boom was an exaggeration and how much was real("Is a real estate bubble looming?," 2 5). The U.S. 51, no. Furthermore, "the Kuwaiti market has some substantial abnormalities and distortions" (Kaganova, Al-Sultan, & Speakman, 2 5). The longer an asset bubble persists, the more likelythat people will tend to engage in this magical thinking.As the model in Figure 3 illustrates, each of these six factors-looselending standards, a fixed supply of real estates, precipitous decline ininterest rates, failure of regulators to intervene, the belief that pricescould never decline, and homebuying as an investment-exerts pressure on thereal estate bubble, expanding it outward and increasing both real estateprices and the pressure resulting from overexpansion. BackgroundThe real estate risks currently prevalent in the Middle East include thoserelated to geopolitical events, the global economic strain, and theregion's real estate bubble characterized by high asset prices and thelooming "burst" of the bubble, which will mean a sudden, sharp devaluationof real estate asset prices.The Middle East has enjoyed booming property markets in recent years, somuch so that the number of foreign players has grown dramatically and theGulf Cooperation Council nations have amassed substantial surpluses thatthey are spending to "develop their infrastructure" (Bradford 2 8). These factors are related to the growing real estate bubble. This over-investment, in turn, can lead to some types of real estate being in oversupply, a condition that Renaud (1997) and Mera and Renaud (2 ) assert "may have a strong negative impact on the financial sector and the economy as a whole" (Kaganova, Al-Sultan, & Speakman, 2 5). Standard & Poor released areport relating Kuwait's real estate market risk to a "lack oftransparency" in real estate information and "investment illiteracy amongtraders," as well as highlighting "the limited number of credit facilitiesalong with the urban concentration [that] would lead to an inflating and anambiguous real estate market" (Al-Abduljader, Alostaz, & Kamali, 2 7). Thischange "made real estate a tax-free investment and inflated the real estatemarket" (Grewal, 2 8).:A failure by regulators to intervene" can also contribute to a real estatebubble (Grewal, 2 8). Samba Financial Group issued areport on Dubai's real estate market that states, "Signs of overheating areemerging, fuelled by expansionary monetary conditions and high oil prices,"a situation that is expected to lead to "a sharp correction" (Atkinson,2 8). Research StrategyThe research will be conducted using the causal-comparative method. The world is, in fact, in the middle of whatThe Economist in 2 5 called "the global housing boom," terming it "thebiggest bubble in history" ("The global housing boom," 2 5). Thebiggest victims of the burst bubble were homeowners, as housing prices fell64% from the peak in 1991 to 2 4 (Fackler, 2 5).that The bubble in Japan was followed by a more recent crash in the largestcity in China, Shanghai, giving evidence of the fact that even thevisibility of a neighboring nation's real estate bubble losses does notprevent another nation from making the same mistakes ("Real estate bubble,"2 8). Federal Reserve stated that "new swap facilities had been authorized with the Bank of Japan for as much as $6 billion; $4 billion for the Bank of England and $1 billion for the Bank of Canada," with the Federal Reserve's action increasing lines of cash to central banks by between $18 billion and $247 billion (Aversa, 2 8). AsChart 1 indicates, The Economist estimates that "the total value ofresidential property in developed economies rose by more than $3 trillionover the past five years, to over $7 trillion, an increase equivalent to1 % of those countries' combined GDPs" ("The global housing boom," 2 5).Chart 1: Residential Property Value Increase Equals Combined GDP ofCountries[pic]Source: Done by authorEconomists use a variety of indicators to identify bubbles before theyburst, among these financial ratios and economic indicators that revealwhether the homes in a particular are fairly valued ("Real estate bubble,"2 8). This fragmentation extends to a lack of training programs and "transaction-level real estate information," and the only summary statistics available are published by the National Bank of Kuwait and some other lending (Kaganova, Al-Sultan, & Speakman, 2 5). Saba argued that Kuwait was not in abubble, terming the situation "a huge pent-up demand that was not being metbecause a lot of projects were at a standstill for years and they are justnow starting to move" ("Is a real estate bubble looming?," 2 5). This review will be utilized to develop an understanding of what precipitates a bubble and the bursting of a bubble, as well as what remedies have been applied afterward to achieve recovery and the comparative success of those remedies. 3. Figure 3. Amjad feels that markets arematuring and current renters want to buy homes and that the increasingavailability of financing and mortgages is increasing the demand andcreating a shortage of such products " ("Omniyat CEO," 2 8). 3, pp.289-3 2, ProQuest, viewed 18 September 2 8,.Kuwait real estate market for the Q2 2 8 (Zawya), 2 8, PGS Real Estate,(Aug 24), viewed 18 September 2 8, .Landler, M 2 8, 'U.S. However, oncethe bubble is created, impeding its expansion is difficult because of thesynergy among some of these factors. The Median Multiple "measures the ratio of the median house price to themedian annual household income," a measure that "has historically hoveredaround a value of 3. 5). When other investors are following the same approach, anindividual investor may become "locked in" to the use of an "extrapolativeforecast rule" (Lansing, 2 7).In Robert J. Evolutional research that incorporates data collection fromquestionnaires will augment the research. As elsewhere in the Middle East, Kuwait is also in the midst of areal estate bubble that could burst in the near future.5. 5, viewed 12 August 2 8,Mirovsky, A 2 7, 'The Beginning of a Bubble?," Haaretz.com, (Jan 1),viewed 18 September 2 8,.Pitawalla, YA 2 6, 'Indian real estate: boom or bubble?,' Fortune, (July5), viewed 18 September 2 8,.Robson, V 2 7, 'Time to adjust: with the oil markets leveling off, the sixGCC states will have to work even harder to deliver continued growth.However, some sectors could benefit from a let-up in activity,' MEED MiddleEast Economic Digest, vol. 4. SSRN.Retrieved on January 1 , 2 9 from:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=879898Kaganova, O, Al-Sultan, F, Speakman, J 2 5, 'Overview of Real EstateMarkets in Kuwait,' Journal of Real Estate Literature, vol. 2. Unfortunately, it is difficult for even the expertsto determine precisely when the crash will occur, so buyers often continueto buy right up until the crash occurs, hoping for the best.2.4 The Bubble in the Middle EastDubai has been the focus of concern in the Middle East with respect to thereal estate bubble. When prices begin tofall, however, the value of collateral falls accordingly, which escalatesthe banks' risk and makes it more difficult for buyers to obtain financingfor their real estate purchases (Hilbers, Lei, & Zacho, 2 1, p. In Bahrain, a $1.2 billion resortcity, Durrat Al Bahrain, is planned, as is a $3 billion waterfrontcommunity, Two Seas (Ford, 2 5).The rising producer costs are significant. 12, no. Figure 5 shows price-dividendratio for the rational and near-rational bubble models and the results of astrictly fundamentals-based model, illustrating that "stock prices driftupwards into bubble territory during bull markets, but these persistentdepartures from fundamentals are eventually eliminated via downwardadjustments during bear markets" (Lansing, 2 7).Figure 5: Rational, Near-Rational, and Fundamental ModelsSource: Lansing, 2 7The near-rational bubble model is the one selected to provide a solution tothe risk of real estate bubbles in the Middle East. Real estate bubbles either have existedrecently or do exist in many parts of the world as of 2 7, most notably inthe United States, Argentina, Britain, the Netherlands, Italy, Australia,New Zealand, Ireland, Spain, France, Poland, South Africa, Israel, Greece,Bulgaria, Croatia, Canada, Norway, Singapore, South Korea, Sweden, theBaltic states, India, Romania, South Korea, Russia, the Ukraine, and China("Real estate bubble," 2 8). Japan's bubble was unique from those occurring inother countries around the world because of the much more steep and rapidrise of property prices, as well as because "speculators used paper profitsfrom a booming stock market to invest in property, insupportably leveragingthe prices of both [property and stocks] higher and higher" (Fackler,2 5). housing collapse spreads overseas,' InternationalHerald Tribune, (Apr 14), viewed 18 September 2 8,.Lansing, KJ 2 7, 'Asset Price Bubbles,' FRBSF Economic Letter, FederalReserve Bank of San Francisco, October 26, viewed 26 November 2 8,.McGreal, R 2 7, 'Housing Bubble Like Badly Applied Wallpaper,' Raise theHammer, (Apr 17), viewed 18 September 2 8,.Middle East Monitor: The Gulf, 2 7, 'The Cap Fits,' vol. IMF Working Paper, Vol. houseprices during the early 2 s, are episodes that have both been describedas "bubbles."A real estate bubble, or housing bubble, exists when trade inreal estate occurs at higher prices than the houses involved are reallyworth. Are there factors that work together to contribute to or cause expansion of the real estate bubble, and if so, what are they and how do they increase each other's influence on the real estate bubble? Conclusion: In the concluding chapter, the conclusions drawn throughout the study will be presented, along with the recommendations for Middle Eastern recovery from the bursting of the real estate bubble that can be appropriated and adapted by other regions around the world.Literature Review2.1 IntroductionThis paper focuses on the real estate bubble in the Middle East. AsFigure 3 indicates, however, co-movements of monthly residential sales withoil production show elastic demand for residential real estate comparedwith less elastic demand in the oil market, thus documenting a morevolatile market for residential sales and a less volatile market for oil(Al-Abduljader, Alostaz, & Kamali, 2 7). This information will be used to construct thequestionnaire. In addition,investors are directly affected, as the value of their investments declinesprecipitously. The assessor to came to verifythe property for the Bank of Jerusalem valued the apartment at only$5 , , but the buyer wanted the apartment anyway, even at an inflatedprice (Mirovsky, 2 7). Although recovery from a real estate crash does take place, it canbe a slow process due to the fact that real estate is not a liquidcommodity ("Real estate bubble," 2 8). What do you see as the most significant risks to potential landowners and homebuyers with respect to real estate price bubbles?References 'Greenspan believes Spain has 'bigger' real estate bubble than US' 2 8,PropertyWire, (Apr 1 ), viewed 18 September 2 8,.'Irrational Exuberance,' Google Books, viewed 26 November 2 8,'Is a Real Estate Bubble Looming?.' 2 5, Zawya, viewed 18 September 2 8,http://zawya.com/printstory.cfm?storyid=ZAWYA2 5 4 6 92121&l= 75348 5 416'Kuwait: Real Estate Losses' 2 8, Zawya, (July 4), viewed 18 September2 8,.'Kuwait real estate market for the Q2 2 8,' Zawya, viewed 18 September2 8,.'Kuwait's Boom Is a Bubble,' 2 3, AMEInfo, viewed 18 September 2 8,.'Omniyat CEO dismisses Dubai property "bubble,"' 2 8, Dubai Property News,(Jan 29), viewed 18 September 2 8, .'Real estate bubble,' 2 8, Wikipedia, (Sep 4), viewed 18 September 2 8,.'The global housing boom,' 2 5, The Economist, (Jun 16), viewed 18September 2 8,.Al-Abdujader, S, Alostaz, RZ, Kamali, B 2 7, 'Kuwait Real Estate Report:Market Analysis 2 7,' Coast Investment and Development Company KSC, viewed18 September 2 8,.Anderson, J, Dash, E, Sorkin, AR 2 8, 'Lehman Files For Bankruptcy;Merrill is Sold,' The New York Times, (Sep 14), viewed 18 September 2 8,.Anonymous 2 6, 'Study Details How U.S. Although the price-dividend ratio that results exhibits excessvolatility, it always returns to approximately its long-run average, unlikethe action of a rational bubble (Lansing, 2 7). From the UnitedStates to other countries around the world, the real estate bubble isspreading like "contagion" (Landler, 2 8). Among therisks currently prevalent in the Middle East, this paper focuses primarilyupon real estate risks. Given this complex of interrelated and synergistic factors, it is challenging for the Kuwaiti and other Middle Eastern people to develop a response to the real estate bubble that can ensure their relative safety in the face of an uncertain world economy and provide a path for preventing a recurrence of the real estate bubble once it bursts. recession that increasingly resembles a depression does not bode well for the Middle Eastern real estate market (Anonymous, 2 6). Of these three types, by far the majority of Kuwait's real estate isresidential, as indicated by the chart in Figure 4. The questionnaire will highlight the major points expounded in this paper and will then ask questions to elicit solutions that can be applied to the problem, at a regional, national, and local level. Harris notes that steel reinforcement pricesrose 46% in 2 7, while the cost of structural steel went up 38%, and thatof cement increased 3 %, changes that are "a function of the globalcommodity boom, as well as strong demand in the region and a weak exchangerate" (Emerging Markets Monitor, 2 8). This is an inexact science at best, with analysts often predictingthe bursting of a bubble well before it occurs or missing it until after ithas happened. * What solutions can be applied at the regional, national, and local levels to promote recovery from the burst real estate bubble? These regulationsrequired banks to increase lenders' required credit credentials for avariety of different types of loans, with the result that real estate loansbecame more difficult to obtain ("Kuwait Real Estate Losses," 2 8).According to official figures, the year-on-year sales in May were down 36%,with residential sales being hit especially hard, having dropped fromKD138.1 million ($52.15 million) in May 2 7 to KD5 million ($188.9million) in May 2 8 ("Kuwait Real Estate Losses," 2 8). Thecomplexity of the bubble will be described, and its relation to the globaleconomy will be identified. In addition, United Arab Emiratesconstruction giant Emaar Properties records "stellar growth," with netprofits increasing by 18 % to US$1.288 billion in 2 5 and a concomitantmortgage industry surge (Emerging Markets Monitor, 2 6). Figure 4. When the bubble reached itspeak in 1991, "all the land in Japan, a country the size of California, wasworth about $18 trillion, or almost four times the value of all property inthe United States at the time" (Fackler, 2 5). 3. Chart 4: Declining Demand for Oil 2 6-2 7 [pic]Source: Done by author Another risk issue in the Middle East is the asset bubble. 6, p. Numerous businessesdepend on the real estate market, such as mortgage companies, companiesthat supply building materials, and home service companies, and these couldall suffer a downturn as well. Can Lessen Foreign Oil Dependency,'Diverse Issues in Higher Education, vol. 23, no. 4).According to Carey (199 ), where the supply of land or buildings is fixed,it is possible for just a few investors willing to pay a higher price todetermine the market price (Hilbers, Lei, & Zacho, 2 1, p. Research PurposeThe purpose of the research is to explore the issues, practices, andfactors that cause a real estate bubble and precipitate its bursting, aswell as the complex of real estate risks that work together to make thebubble volatile. AttorneyYizhak Hajaj represents buyers in Tel Aviv's new northern neighbourhoodsand "rejects claims of a bubble," saying that "there is a large group ofbuyers that can pay these prices and is not deterred by them" (Mirovsky,2 7). Introduction: In this chapter, an overview is provided of the rising costs and population in the Middle East, and in Kuwait in particular, coupled with the real estate risks prevalent in the area. As early asDecember 2 3, a developing bubble was identified in Kuwait, when theKuwait Stock Exchange hit an all-time high of 4,589.7 points, up 93.2%since the start of the year ("Kuwait's Boom Is a Bubble," 2 3; Chart 2).Chart 2: Kuwait Stock Exchange Rises 93.2% in one year[pic]Source: Done by authorNow in 2 8, Kuwait is already experiencing high levels of inflation andits residential property sales have been declining since the market peakedlast July; the National Bank of Kuwait issued figures in April showing that"average house prices...tumbled 6 % between that peak and February 2 8"("Kuwait: Real Estate Losses," 2 8). When the bubble becomes unsustainable, prices suddenlycollapse-a phenomenon referred to as the "bursting" of the bubble-andreturn precipitously to their real levels, a phenomenon referred to as the"bursting" of the bubble.A burst bubble, or asset price devaluation, "can result in many ownersholding negative equity (a mortgage debt higher than the current value ofthe property" ("Real estate bubble," 2 8). 1 . The Dow Jones industrial average, which suffered "its steepest drop since the days after the Sept. 2. 6. 11 attacks" on September 16, lost an additional 45 points on September 18, causing approximately $7 billion in investments to evaporate (Aversa, 2 8). 5) state "tends toexacerbate real estate cycles." They point out that since real estate is"one of the few acceptable forms of collateral," companies may borrowfurther in order to expand, resulting in a form of "Ponzi finance" that canprecipitate overbuilding (Hilbers, Lei, & Zacho, 2 1, p. Thistype of financial liberalization leads to an oversupply of credit thatmakes credit available to the homebuyer that is a greater risk because ofpoor credit or an income that is too low. Likegamblers on a winning streak, real estate investors are often lulled intothinking that over-the-top prices will continue, but the fact that pricesare inflated is already an indication that they are heading toward acollapse. This turn of events, according to NewYork Times journalists Vikas Bajaj and David Leonhardt, "made buying realestate a more common investment tool, making it something in addition tojust a means of putting a roof over one's head" (Grewal, 2 8). 4, (Jan 26), pp. Lansing adoptsSchiller's "irrational exuberance" model and tempers it with a morerealistic model that is capable of becoming negative occasionally.Schiller's (1981) feedback model is predicated on the "excess volatility"that they identify in stocks, where a rise in asset prices creates successfor some investors that attracts further attention by the public; thisincreased attention "fuels the spread of enthusiasm for the market,"drawing less experienced investors into the market (Lansing, 2 7). Dubai's property firms have seen their sharesfall, and the largest listed firm, Emaar, plunged 8% in September 2 8 toreach a 3 ½-year low (Atkinson, 2 8The Emerging Markets Monitor in May 2 8 stated that "The signs in Gulfproperty markets at the moment are mixed," pointing out that "Newdevelopments just keep on appearing." The publication cites Abu Dhabideveloper International Capital Trading, Limitless, and Nakheel, whose new6 -square-kilometer city at Ghantoot, Arabian Canal, and Dubai Waterfrontprojects, respectively, could accommodate a total of 4 million people(Emerging Markets Monitor, 2 8). When the stock market andproperty market subsequently crashed, Japan's central bank raised interestrates too aggressively, plunging prices into a downward spiral that theywere just beginning to recover from 14 years later, when Japan's land wasworth less than half what it cost during its 1991 peak (Fackler, 2 5). The research will examine the factors that suggestthat a real estate bubble currently exists in the Middle East, andspecifically in Kuwait, and will identify the causal agents and synergisticeffects that promote the bubble and make it volatile, culminating ininsights that can serve as the foundation for a regional recovery plan. Using a valuation component that measures"how expensive houses are relative to what most people can afford" and adebt, or leverage, component, that "measures how indebted households becomein buying them for home or profit," the state of a bubble can beapproximated ("Real estate bubble," 2 8).Housing affordability measures such as the price to income ratio, thedeposit to income ratio, the affordability index, and the Median Multipleprovide insight into how affordable houses are in the current market ("Realestate bubble," 2 8). 29, ProQuest, viewed18 September 2 8,.Atkinson, T 2 8, 'Dubai real estate risks sharp correction - report,'ArabianBusiness.com, (Sep 7), viewed 18 September,.Aversa, J 2 8, 'Top Banks Scramble To Ease Credit Crisis,' The AssociatedPress, AOL Money & Finance, (Sep 18), viewed 18 September 2 8,.Belke, A, Wiedmann, M 2 5, 'Boom or Bubble in the US Real Estate Market?,'Intereconomics, (Sept/Oct), 273-284.Bradford, M 2 8, 'Infrastructure projects draw foreign insurers to MiddleEast,' Business Insurance, Vol. It also becomes negativeat times, unlike the rational bubble, and can cause the stock price to fallbelow its fundamental value (Lansing, 2 7). Ali contended that although some priceshad skyrocketed, on average they had only risen 15% to 18% per year loan("Is a real estate bubble looming?," 2 5).By 2 7, concerns were growing about the real estate market's rate ofgrowth, and investors began anticipating that the bubble would burst (Al-Abduljader, Alostaz, & Kamali, 2 7). When compared with "a more freely balanced real estate market" such as that of the United States, Kuwait's market is "dominated by transactions of multi-apartment buildings" (Kaganova, Al-Sultan, & Speakman, 2 5). Problem DefinitionThe term "bubble" was coined in 172 England following the South SeaCompany's famous "price run-up and crash of shares" (Lansing, 2 7). Further, thecurrent housing bubble's "rising property prices helped to prop up theworld economy after the stock market bubble burst in 2 ," a sign thatbubble economies are synergistic ("The global housing boom," 2 5). this segment makes up 8.5% of total market turnover" (Kaganova, Al-Sultan, & Speakman, 2 5). (2 1). Labeled "the mostexciting real estate market in Asia" in 2 6, India's real estate bubblehas grown quickly since then (Pitalwalla, 2 6). Moreover, "commercial properties are strongly under-represented," and "some categories (such as hotels and land) are not present in the Kuwaiti private market at all (Kaganova, Al- Sultan, & Speakman, 2 5). Data AnalysisLiterature review will be conducted first to establish a baseline of realestate risk factors and how they relate to the real estate bubble. In New Delhiand other areas of northern India, the past year has seen prices fall 2 %,a situation that Cushman & Wakefield real estate firm director Sanjay Duttdescribes as "an erosion of confidence" (Landler, 2 8). The"hyperactive market" of Hong Kong apartment sales has also slowed down, andmass-market flat prices have begun to drop (Landler, 2 8). Shiller (2 6) adds real estate to theanalysis of financial market volatility and demonstrates that "investing incapital markets of all kinds in the modern free-market economy isinherently unstable" due to the human propensity to exhibit irrationalexuberance ("Irrational Exuberance," 2 6).Lansing (2 7) points out that not all investors are irrationallyexuberant, but some, operating on a rational model, are completely aware ofan asset's true value but are willing to pay more than it is worth anyway,particularly if it is expected to appreciate enough in value to provide theinvestor's needed rate of return. Instead, Ghazaly urged people to buy real estate,contending that supply and demand were "evenly aligned" and that Kuwait was"still at the beginning of the upward curve" and would continue toappreciate" " ("Is a real estate bubble looming?," 2 5). 5).Another factor that can contribute to the creation of a real estate bubbleis a fixed supply of real estate (Hilbers, Lei, & Zacho, 2 1, p. One thing is clear, though; real estate bubbles are becomingmore common, not just in the Middle East but around the world.2.3 Overview of Real Estate BubblesViewed from a global perspective, the real estate bubble in the Middle Eastis part of a larger trend. 2 , viewed 12 August 2 8,Euro Property, 2 5, 'Opportunities and Knocks,' p. Tarek Ali, anentrepreneur and the creator of the E-Dar online real estate service,injected skepticism, indicating that there were not many statisticsavailable to prove definitively whether the market was up or down "and byhow much" ("Is a real estate bubble looming?," 2 5). Thiscauses demand to fall even further, and prices fall along with it, aphenomenon that Hilbers, Lei, and Zacho (2 1, p. 4. Chart 3: Kuwait Real Estate Market Performance Q1 2 8 to Q4 2 8 [pic] Source: Done by author Furthermore, the second quarter was 37.1% less than the same quarter in 2 7, which was KD1,19 .4 million ("Kuwait real estate market for the Q2 2 8," 2 8). Even more importantly, "these high prices represent significant wealth accumulated by property investors, so any moves to adjust the market may have serious negative economic consequences, in terms of (1) wealth effects on consumer spending, (2) bank lending and viabililty, and (3) general political and economic stability" (Kaganova, Al-Sultan, & Speakman, 2 5). 6. Real Estate Bubble Model[pic]Like a soap bubble, a real estate bubble can only grow so big beforebursting, so the very presence of a bubble indicates that a sudden,dramatic devaluation of real estate assets is virtually inevitable. Siso identifies the 2 7 prices of$15, per square meter as being "beyond the peak real prices" and insiststhat they "reflect the beginnings of a bubble" (Mirovsky, 2 7). Loose lending standards, for example,encourage homebuying as an investment, as does a precipitous decline ininterest rates, and the failure of regulators to intervene encourages thebelief that prices could never decline. Thus, over-investment may occur as "private investment in real estate...may overflow those sectors that are available for private investors," especially in the case of small- and medium-sized investors that have fewer investment alternatives available to them than "investment powerhouses" do constraints (Kaganova, Al-Sultan, & Speakman, 2 5). Do you believe there is a real estate price bubble-i.e., inflated real estate prices-in the Middle East? The International Herald Tribune reported inApril 2 8 that "The collapse of the housing bubble in the United States ismutating into a global phenomenon, with real estate prices down from theIrish countryside and the Spanish coast to Baltic seaports and even inparts of India" (Landler, 2 8). What do you consider to be the primary causes of the real estate bubble? 5. Theseless experienced investors are said to be in a state of "irrationalexuberance" rather than the one of "rational speculation" that attendsseasoned investors, and the irrational exuberance drives up expectations ofadditional price increases as investors assume that recent price activitywill continue far into the future (Lansing, 2 7). This is, in fact, what is occurringright now in the United States. It has been proposed that the "near-rational" bubble model provides a solution to the risk of real estate bubbles in the Middle East. AshrafGhazaly, the Managing Director of Coldwell Banker Egypt, also stated,"There's no bubble" ("Is a real estate bubble looming?," 2 5). Alaa Saba, chairman ofBeltone Asset Management, stated, "The problem with real estate is that itis very difficult to evaluate. Merrill Lynch predicted in 2 6 that "the Indianrealty sector will grow from $12 billion in 2 5 to $9 billion by 2 15"(Pitalwalla, 2 6). 5. TheMiddle East, however, is "a focal point for global risk and its mitigation"Forum, 2 7). The analyst points out that "With the US economy onsuch shaky foundations, OPEC countries starting to abandon the petrodollarsystem, and global oil production sliding into decline, loss of confidencein the dollar and the threat of hyperinflation will constrain thegovernment's capacity to spend its way out of the next crisis" (McGreal,2 7). Two primary economic factors werethought to contribute to the impending burst-the banking system and the oilmarket-both of which were feared would lead to a breakdown of the market(Al-Abduljader, Alostaz, & Kamali, 2 7). Japan'sbubble was "fuelled by cheap money and financial liberalization," with mostpeople assuming that the property prices were not going to fall nationally(The Economist, 2 8). Ali stated that since themortgage law had been passed in 2 1, little has happened, claiming that inits first six months of operation Taamir had issued just one loan ("Is areal estate bubble looming?," 2 5). 49, EbscoHost, viewed12 August 2 8,Fackler, M 2 5, 'Take It from Japan: Bubbles Hurt,' The New York Times,(Dec 25), viewed 11 January 2 9,Ford, M 2 5, 'Supplement: Real Estate Investment - Bahrain - Bahrainboards the bandwagon,' Foreign Direct Investment, (Aug/Sep), ProQuest,viewed 25 November 2 8.Grewal, K 2 8, '5 Things That Led to Real Estate Bubble and Pained ETFs,'ETF Trends, December, viewed 1 January 2 9,.Hilbers, P., Lei, Q., Zacho, L.S. hedge fund FarallonCapital Management and its joint-venture partner Indiabulls purchased an 11-acre property in Mumbai in March 2 5 for $54.5 million per acre, an actiondeemed "an act of idiocy" by local developers (Pitalwalla, 2 6). As Figure 5 shows,this model provides not only a more realistic model but one which tends toincorporate long-term averages and not just wild fluctuations. However, Ghazaly didacknowledge that sales had gone up roughly 85% in one year because "most ofthe unsold properties in new communities that had accumulated over the pastsix years were actually purchased in 2 3" ("Is a real estate bubblelooming?," 2 5). The deposit to income ratio is "the minimumrequired downpayment for a typical mortgage, expressed in months or yearsof income," a measure that is "especially important for first-time buyerswithout existing home equity," since a too-high downpayment can pricebuyers out of the market ("Real estate bubble," 2 8). crude oil prices also fell from a summer peak of $8 per barrel to a 2 -month low of $55 per barrel (Robson, 2 7). economy and product consumption. Kiyotaki and Moore (1995)pointed out that "loans collateralized by real estate" were problematicbecause "increasing real estate prices raise the market value of collateralon outstanding real estate loans," lowering lender risk and increasingtheir willingness to make real estate loans (Hilbers, Lei, & Zacho, 2 1,p. When property prices fell anyway, borrowersdefaulted on loans, causing banks to cut back on lending-a chain of eventsthat resulted in an entire decade in which the average growth was under 1%(The Economist, 2 8). Moreover, salvaging that bubble, argues oneeconomic analyst, is "the macroeconomic equivalent of pushing down on badlyapplied wallpaper. The real estate bubble can burst at any time, and when thathappens, the entire real estate market could collapse. 2. He boldlystated, "Today I believe real estate is the most secure asset that you canhave in your portfolio" ("Is a real estate bubble looming?," 2 5).Not everyone agreed with the no-bubble assessment, however. Research Questions * What real estate risks exist in the Middle East, and specifically in Kuwait? It is all based on relativevaluations...comparison rather than fundamental analyses" ("Is a realestate bubble looming?," 2 5). InternationalRealEstateInvestment.org asks pointedly,"Can rising oil prices keep Dubai's fast growing real estate market fromimploding?" ("Real Estate Bubble in Dubai?" 2 8). Thesolution for the Middle East's risks related to the real estate bubble isto use transport the near-rational model for use in predicting thetrajectory of the Middle Eastern real estate bubble and apply controls andrestraints accordingly to facilitate investment in accordance with how thebubble will progress. 5. Can you recommend any solutions to prevent the real estate bubble from bursting? We keep hearing that thesupply and demand will be realised in 2 8 or 2 9, but while I believethat demand will become less extreme, it will continue to outweigh supply"("Omniyat CEO," 2 8). The housingaffordability index, although difficult to calculate, "measures the ratioof the actual monthly cost of the mortgage to take-home income" and "offersa much more realistic measure of the ability of households to affordhousing than the crude price to income ratio" ("Real estate bubble," 2 8). * How does the bubble play into the global economy? Moreover, "thevalue of all property deals in Kuwait fell from KD229m ($865m) last May toKD146m ($551m) this year," a decline only partially offset by strongcommercial property sales and a relatively moderate drop in investmentproperty sales" ("Kuwait Real Estate Losses," 2 8).The fewer properties that property owners possess, the greater the amountof the price they intend to take out as a mortgage, suggesting that thoseleast able to afford real estate investments are obtaining the largestmortgages (Emerging Markets Monitor, 2 8). In Kuwait, there are two common means of transferring the ownership of privately owned real estate, by sale and by power of attorney," or PoA (Kaganova, Al-Sultan, & Speakman, 2 5). 9. When people see oil prices come down, they have an excuse to sit on the side" (Robson, 2 7). Kuwait Real Estate and the Oil Market Co-Movements of Monthly Residential Sales with Oil Production[pic] Source: Al-Abduljader, Alostaz, & Kamali, 2 7Kuwait has three types of property-residential, investment, and commercial. In 2 7, a mild U.S. 8. Thus, these six factors worktogether to produce ongoing expansion of the bubble.Figure 3. PoA has the advantages of rendering transactions faster and less expensive, but it is only valid for 15 years and is not mortgageable and is "associated with some additional risks," so it is mainly used for purchasing property that will only be kept for a short time (Kaganova, Al-Sultan, & Speakman, 2 5). Because the region is "interconnected by webs ofinvestment, of geopolitics of religious affiliation -as well as physicalinfrastructure of pipelines for oil and sources of water...many of thepossible mitigation measures to deal with the consequences of global risksstem from within the region" (World Economic Forum, 2 7).In the Middle Eastern real estate market, real estate, stocks, commodities,and gold are priced very nearly at "historic highs," while "global interestrates are low and bond markets are doing well" (World Economic Forum,2 7). In addition, the questionnaire explored theconnection between the real estate bubble and the global economy.Respondents were asked to suggest solutions that might be applied at theregional, national, and local levels to promote recovery from the realestate bubble when it bursts, as well as to recommend solutions forpreventing the bubble from bursting.through questionnaires that investigate the causes and synergistic effectsof the Middle East's real estate bubble.The questionnaire consists of the following questions: 1. Methodology: This chapter will present the methodology to be used in the study, including the literature review and establishment of the baseline, the development and dissemination of the questionnaires, and the analysis of the data in conjunction with the literature review to arrive at a recommended recovery strategy for the Middle East. According to August 2 8 real estate sales reports issued by Kuwait's Ministry of Justice Real Estate Registration and Certification Department, "The performance of the real estate market in Kuwait declined for the second quarter" by 21.7%, or KD2 7.7, from KD 957.3 in the first quarter to KD749.6 in the second ("Kuwait real estate market for the Q2 2 8," 2 8; Chart 3). 4. 4). 3. If so, explain how the economy affects the bubble. In mid-January 2 7, U.S. This follows on the sale of Merrill Lynch to Bank of America and the demise of Lehman Brothers (Anderson, Dash, & Sorkin, 2 8), with Washington Mutual close behind as it fell 13% on September 18 after losing $3.3 billion in Q2 (Aversa, 2 8). A drop in oil prices could slow down the private sector's growth and cause investors to hesitate before buying real estate (Robson, 2 7). Only afew months later, the same joint venture was offered $95.5 million per acrefor a property nearby, and that was "the second-lowest bid" offered(Pitalwalla, 2 6). Shiller's book, Irrational Exuberance, he compares the recenthousing market boom with the late-199 s stock market bubble, predictingthat it will result in "declining home prices for years tocome"("Irrational Exuberance," 2 6). Real Estate Market Developmentsand Financial Sector Soundness. Experts predict, in fact, thanin some countries, such as Ireland, the bursting of the real estate bubblewill be even more damaging than in the United States, "with the possibilitythat the downturn could turn into wholesale collapse" (Landler, 2 8).lLeading economist and former chairman of the U.S. Japan's burst bubble was "one of the biggest property marketcollapses in modern history" (Fackler, 2 5). , pp. In addition, it has identified rising producer costs, soaring property prices, an exodus of foreign workers due to high rental costs, rampant real estate inflation, and the impact from and upon the global economy. Structure of the ThesisThe thesis is composed of five chapters: 1. As the Israeli bubble demonstrates,even the experts often disagree on the existence of a bubble, what iscausing it, and when it will burst.Even in Turkey, where a mortgage system is yet to be developed, aburgeoning housing industry suggests a possible real estate bubble might begathering force (Sahici & Emlak, 2 7). Just like an actual soap bubble, thelarger the real estate bubble becomes, the more unstable it is and the morelikely that it will not be able to sustain its own weight. 5). Housing prices could plummet, leavinghomeowners with properties that they paid much more for but that end upbeing worth little within just a short span of time. This model provides a realistic picture of the bubble but uses long-term averages to gain a better perspective than can be obtained using the rational model, which allows for wild fluctuations. 42, No. In the Middle East, where the U.S.'s consumption of 6.3 million barrels a day of oil from the Persian Gulf region is a significant contributor to the economy, a U.S. * How can the near-rational model be applied to the Middle Eastern real estate bubble to prevent the bubble from bursting? The United Arab Emirates' central bank governor, Nasser al-Suweidi, warnedas far back as 2 5 that there would soon be "too many housing units," anddespite new laws intended to prevent a decline in the sector, 14 newprojects were announced there (Emerging Markets Monitor, 2 6).These conditions combine to form significant real estate risks in theMiddle East. The high asset prices "have been financed by unprecedented levelsof debt...[and] any asset devaluation would have major effects on theglobal economy" (World Economic Forum, 2 7) . The lower the interest rate, the more people are tempted to buy,because they know that over the term of the loan, the cost of the house orproperty will be far less than it would be at the usual interest rate.Finally, as Grewal (2 8) points out, there is "a collective belief thatreal estate prices could never decline." People investing in real estateduring a bubble may be dimly aware that the prices are inflated, but theyoverlook the risk that prices could return to their real level at somepoint in the future. Has the real estate bubble in the Middle East affected your intended purchase of land or housing. * Is there a Middle East real estate bubble, and if so, what are its causal agents? * What are the factors and synergistic effects that promote the bubble and make it volatile? In the Middle East as a whole, real estate risk is tied to the oil industry, and "after burning ahead on their oil income for the past four years, the Gulf states now face a double whammy of falling oil prices and demand" (Robson, 2 7). Dubai's inflation isrising at the rate of 15% per year due to rising oil prices, and an articlein The Guardian reports that "approximately 1/5 of the world's constructioncranes are at work in Dubai" ("Real Estate Bubble in Dubai?" 2 8). U.S. Rental housing rates stand at 16.1%,"the most rapidly rising element of the consumer price index" ("Kuwait:Real Estate Losses," 2 8). In this chapter, the state of Middle Eastern realestate and Middle Eastern real estate risks will be detailed, and the realestate bubble will be examined in greater detail. 1-34. Even then, the Reserve Bank of India was concernedenough about an asset-price bubble to raise the real estate loan riskweightage, causing mortgage rates to go up from 7.5% to 9.5% (Pitalwalla,2 6). According to the National Bank of Kuwait's chief economist Randa Azar Khoury, "There has been a lot of euphoria and private investor confidence is high. "I know," he replied, "but a completely outfitted apartment where Idon't have to alter a thing is convenient for my trips to Israel"(Mirovsky, 2 7). As "supplycatches up with demand" in the next year, Dubai is "most at risk from acorrection," because other states have the protection of higher non-speculative demand from indigenous investors and find themselves in earlierstages of market development than the United Arab Emirates, which are nowsaturated (Emerging Markets Monitor, 2 8). The Real Estate Bubble in the Middle East and Its Associated Risks and Factors By [Name] This paper was submitted in partial fulfillment of the requirements for the degree of Master of Business Administration (MBA) At Maastricht School of Management, MSM Maastricht, the Netherlands Maastricht School of Management P.O.Box 12 3 62 1 BE Maastricht The Netherlands Introduction 1. Figure 1: Number of Properties Owned[pic] Source: Emerging Markets Monitor, 2 8Figure 2: Percentage of Property Price Taken Out as Mortgage[pic] Source: Emerging Markets Monitor, 2 8With Dubai at the forefront, the Middle East is facing "rising producercosts, the possibility of a consumer-led demand-side shock, and the threatof a speculative bubble" (Emerging Markets Monitor, 2 8). Mirovsky (2 7) points out that, "This is how areal estate bubble develops."Another factor is the elevation of homebuying to an investment strategy.In the United States, for example, a provision in the Taxpayer Relief Actof 1997 provided greater tax advantages for real estate investment than forany other investment option available, thus encouraging people to buy homesas an investment (Grewal, 2 8). 2 , EbscoHost, viewed 12 August 2 8,Emerging Markets Monitor, 2 8, 'GCC: Dubai at Forefront of Real EstateRisks, vol. 17, no. Federal Reserve, AlanGreenspan, stating states that Spain's bubble is even larger than America's("Greenspan believes Spain has 'bigger' real estate bubble," 2 8).Greenspan explains that because Spain's bubble is "bigger than mostEuropean countries, even bigger than the one in the United States...in thatsense one would have to presume that there is more vulnerability"("Greenspan believes Spain has 'bigger' real estate bubble," 2 8).Greenspan's diagnosis coincides with news that one of Spain's leadingbanks, Cajasol, has refused to fund new construction on Spain's rural land,particularly golf course schemes ("Greenspan believes Spain has 'bigger'real estate bubble," 2 8). The U.S. Amjad is"looking for opportunities in the residential sector," and Omniyat is readyto unveil a new 1.5-million square foot residential waterfront developmentin October at the Cityscape exhibition" ("Omniyat CEO," 2 8).Amjad's opinion not withstanding, the vast majority of the literatureconcurs that there is an ever-increasing real estate bubble in the MiddleEast, as well as in a number of industrialized nations around the world.In Turkey, too, analysts are identifying a growing bubble. Thus, the presence of a real estate bubble heralds a coming realestate market crash. Pie Chart of Kuwait Real Estate Market by Type [pic] Source: Al-Abduljader, Alostaz, & Kamali, 2 7 2.6 Real Estate Risk in Kuwait and the Middle East Given the state of the real estate market in the Middle East and the impending burst of the real estate bubble in Kuwait and other Middle Eastern nations, the real estate risk in the region is coming under closer scrutiny. Research Methodology 1. The complexity of real estate risk in the region is described, and the difficulty in quantifying and controlling the bubble is clarified. These distortions arise because there are few privately owned commercial and farm properties in Kuwait; none of the industrial properties are privately owned, " due to artificial constraints (Kaganova, Al-Sultan, & Speakman, 2 5). Inthis near-rational bubble model, investors use "a simple extrapolativeforecast rule" fitted to stock market data that is observable (Lansing,2 7). The declining sales and impending bubble burst are not the only risks, however. According to a 2 7 article in theTurkish Daily News, the "demand for residences" has caused the real estatesector to "take a big leap forward in the past two years," resulting in6 , people becoming homeowners in Turkey thanks to decreased bank loaninterest as low as 1% (Sahici & Emlak, 2 7). The recovery approach developed here can then be appropriated and adapted for use in other regions to address what is rapidly becoming a common problem. Most mortgage lending decisions are based upon this ratio ("Realestate bubble," 2 8). The Kuwait real estate market is characterized by exceptionally high prices for land used for housing, commerce, and industry, and the high prices "have significant negative consequences for private sector competitiveness," deferring return on investment and forcing people to rely upon the government to obtain their homes (Kaganova, Al-Sultan, & Speakman, 2 5). The Kuwaiti government, he explained,had brought in Sameh El-Torgoman as head of the Ministry of Investment'sMortgage Financial Authority to boost real estate activity loan ("Is a realestate bubble looming?," 2 5). In a global economy, these kinds of critical events cannot help but affect nations elsewhere in the world, even those that are not directly affected by the U.S. Thus, as real estate bubbles arebursting and have burst around the globe, the worldwide economy can beexpected to suffer for many more years before a full recovery is under way.The impending bursting of the real estate bubble in the Middle East, inconjunction with other risks such as rising costs and insurance risks,poses a threat to the economy in that region and will most likely have aripple effect in the global economy as well. Further insights on how to recover from the burst bubble willbe gathered from questionnaires to provide a baseline for a recovery plan. As Lansing(2 7) points out, "the bubble carries the seeds of its own destruction; ifprices begin to sag, pessimism can take hold, causing some investors toexit the market." Then, "Downward price motion begets expectations offurther downward motion, and so on, until a bottom is eventually reached"(Lansing, 2 7). Data Collection MethodData collection will be through questionnaires that investigate the causesand synergistic effects of the Middle East's real estate bubble. Mirovsky (2 7) points out that, "This is how a realestate bubble develops." Furthermore, as Yaacov Siso, deputy CEO at theBank of Jerusalem, indicates, "Economic theories cannot explain uneconomicbehaviour, such as the French buyer in Netanya, and cannot forecast wherethe market will go" (Mirovsky, 2 7). Geopolitical risk is evidenced by "a high concentration ofdestabilizing geopolitical events having their origin in the Middle Eastregion," and risks related to energy security, climate change, and globaleconomic imbalances also have their roots in the Middle East (WorldEconomic Forum, 2 7). By April of 2 6, land prices in India had risen 3 % to 1 %, andreal estate stocks had gone up as much as 2, % (Pitalwalla, 2 6) If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.