Gulf states should aim to stabilise property prices

05 June 2009

As commodity prices drop, Gulf business fortunes are reversed. Stabilisation of real estate prices is vital to avoid sustained deflation.

Just 12 months ago inflation was one of the biggest problems facing the Gulf. One financial crisis later and that situation has been completely reversed.

The GCC economies now face the dangers of deflation as the real estate bubble bursts, commodity prices continue to drop, and global food inflation abates.

Falling prices are hitting companies who stocked up on inventory to capitalise on the region’s double-digit inflation rates. Many are now sitting on stock worth substantially less than they paid for it, and it seems the downward price shift has some way to go.

Forecasts are split, with some economists expecting deflation in 2009 and others anticipating only a slowdown in the pace of inflation.

The extent to which this slowdown slips into deflation will depend in large part on the extent of the correction in real estate values. Deflation will almost certainly be an issue for at least part of 2009, even if prices do manage to register some growth during the year.

A correction in the overheating economies of the UAE and Qatar will be a relief to residents, but businesses and government have to be careful that it does not result in longer term issues which threaten an economic recovery.

Stabilisation of real estate prices is now vital to avoid a deflation problem. The quicker the market hits rock bottom, the sooner a recovery can begin. Until then, many investors are sitting on the sidelines waiting for enough transparency to give them confidence to invest.

No one doubts the long-term fundamentals of markets but in the short term the expectation is that prices still have some way to fall.

Fortunately, the region has the resources to keep pumping money into the system, to ensure there is enough liquidity to kickstart growth when confidence returns. This would suggest that if it happens deflation will only be a temporary problem, before the more familiar problem of inflation returns.

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