Property Price Controls over the Horizon

Property Price Controls over the Horizon?
A property market that starts to witness a price growth attracts speculators from all corners.  The UAE’s overwhelming property slump experience has attributed a negative connotation to these speculators. So much so that even growth based on strong fundamentals, which started in mid-2012, was looked at with much skepticism. There has been so much written on the necessary evils of speculation, but this article intends to acknowledge the role speculators have played in getting the UAE’s property sector back on track.

Speculation – What is it?
It is an act of trading in an asset that has a substantial risk of losing most or all of the initial outlay, in expectation of a significant gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there will be little motivation to speculate. However, speculation differs from gambling, the former is a calculated risk that is not dependent on pure chance like the latter.

Advantages of Speculation – Are there any?
Yes. Speculation provides liquidity to a market and considerably narrows the bid-ask spread in a free economy.  After the UAE property market slump in 2009, developers faced a near to zero-demand situation. With no takers of existing properties, there was no stimulus for further development. The flight of investors or speculators due to the recessionary conditions led to a liquidity shortage that stalled construction activity on most on-going projects.

Overtime, the UAE’s business activity picked up momentum, though the property market was still overcast with investor gloom.  As property investment continued to be high-risk, only an investor with a speculative appetite could enter the market. And that marked the beginning of eventual price appreciation. Even though speculators entered the market to benefit from short term price fluctuations, they provided the much needed liquidity to fuel activity in the property sector leading to completion of stalled projects and new project developments.  These cues catalyzed investors with a moderate risk appetite to stop being market observers and attain a more active role, thereby resulting in increased investor confidence and overall recovery of the sector.

A co-existence of all market players – speculators, investors, owner-occupiers etc. – in a suitably controlled environment represents a healthy market. Just as a balance goes through various ups and downs before reaching equilibrium, the power play between these players varies at any given point of time.  Prudent adjustments in the regulatory environment act as weights that control or minimize sudden movements in the market.

Overheated Property Market – What other markets are doing?
Most economists agree that a property bubble emerges when house price gains are fuelled by borrowed money.  Even though Dubai’s recent property transactions are mostly characterized by cash buys (about 85%) and still a far cry from being overheated, the UAE has taken two major steps to counter the emergence of any such bubble. First step, taken by the Dubai Land Department, was to double the transaction fees from 2% to 4% for all property transactions in Dubai except for the industrial sector, effective October 2013. The second step, announced in the same month by the UAE Central Bank, was the introduction of the new mortgage caps under which mortgages to first-time buyers of a property worth up to AED 5 million are capped at 80% for UAE citizens and 75% for expats. Mortgages for second-time purchase will be capped at 65% and 60% for locals and expats respectively. Also, mortgages should not exceed 25 years.

We look at what steps other markets – Malaysia, China, and London – are mulling to take to check property price growth?

Malaysia is considering reinstatement of full real property gains tax (RPGT), removal of developer interest bearing scheme (DIBS) (wherein developers bear the bank interest during the construction period), affordable housing initiatives by the Government, and higher price thresholds for foreign buyers in its Budget for 2014. It has been proposed that property gains within the first three years will be taxed at 30%, 20% in the fourth year, 15% in the fifth year while property sold after six years will not be taxed. The price bracket for foreign house purchases will be raised to RM 1 million (AED 1.15 million) from RM 500,000 (AED 570,000).

To cool down the prices in Beijing, the Beijing municipality intends to introduce 70,000 homes under affordable housing schemes. Other measures taken by the government include restrictions on home purchases (maximum two homes per resident), increase in down payments, limitations on bank lending and direct government intervention in developer asking prices.

Suggestions to check speculation in London property market include introduction of a cap on the proportion of overseas investors in all developments, implementation of property speculation tax and tax on resale of properties and increase in affordable housing.

As each property sector is unique, price control measures are specific to the market dynamics of that country. None of the above steps can be implemented as it is without incorporating country-specific adjustments. After all, the aim for such measures is to maintain a sustainable growth. In our view, a little defiance (speculative) should be permissible as long as market stability is under efficient controls.