When times are tough, we're inclined to latch on to news and perhaps see something in it that is not really there. A recent note from a Dubai investment firm on the emirate's property market shows that tendency in action. MAG Group Property Development sees good news in an increase in the top tax rate in Britain. Earnings above £150,000 (about Dh837,000) a year are due to be taxed at 50 per cent starting next month. The top rate has long been 40 per cent.
Mohammed Nimer, MAG Group's chief executive, contends that the increase will convince so many UK residents to move to the UAE that it will help put a floor under home prices. "Under the new UK tax rules, somebody with a personal income in excess of £200,000 will have to pay £5,000 more per year in tax," Mr Nimer says in his firm's note. "That's a very strong incentive to relocate to lower or tax-free environments, such as the UAE."
He offers evidence in the form of a poll of well-to-do British nationals attending a conference on the relative merits, financial and otherwise, of relocating overseas. In the poll, conducted by an international law firm, 75 per cent of respondents said they were likely to move abroad within the coming year. Almost as many, seven out of 10, said they would move their families and their businesses.
These results should be taken with a large grain of salt, mainly because this is not a random sample. Observing a widespread desire to leave the country to escape tax at a conclave of disgruntled taxpayers is like concluding that motor racing is the most popular pastime on earth based on a survey taken at a Formula One event. But what would these people with itchy feet and lighter wallets do once they arrived in the UAE? Are there jobs waiting for them, and would they really pull up stakes if there aren't?
Property prices collapsed because of overbuilding fuelled by far too easy credit, but they have stayed low for the same reason as in the US, Britain and elsewhere: soft employment conditions. People are reluctant to make the biggest investment of their lives - buying a home - if they're unsure of their ability to remain employed and keep making mortgage payments. Let's give MAG Group the benefit of the doubt and assume that wave after wave of well-off Brits will find paying an extra few grand in tax so onerous that they would choose to move abroad to avoid it. Let's also say that a substantial number opt for the UAE and the authorities are happy to grant them all visas.
Without a corresponding increase in available jobs, the presence of so many immigrants actually might keep a lid on home prices. The fierce competition for employment would raise anxiety about job security and also limit growth in salaries and therefore home affordability. Banks might not be very keen to extend credit amid such a backdrop. They would be reluctant - with good reason, especially after some of the poor decisions of the last few years - to lend money to homebuyers whose jobs are not secure.
Such reticence is already on display. After more than doubling in 2008, the outstanding value of mortgage loans on the books of UAE banks grew at the far more sedate pace of 11.7 per cent in the first 11 months of last year, according to the latest figures published by the Central Bank. In a particularly ominous sign for the property market, there was virtually no growth last autumn. And while the bank does not break down its data by emirate, it would hardly be astonishing if mortgage lending contracted in Dubai last year and expanded in Abu Dhabi and the smaller emirates.
A more realistic appraisal of the Dubai property market than MAG Group's comes from the Jones Lang LaSalle consultancy. Residential and other types of real estate "are all becoming more favourable for tenants," the firm states in a recent report. "This trend is likely to continue into 2010 with increased vacancies and a continued decline in average prices and rentals across the market." The worst phase of the downturn may be over now that speculation has been reduced substantially. When homes are bought, it's by people who want to put a roof over their heads, not make a quick score.
But the outlook for the property market is unlikely to brighten significantly until two other critical markets, for jobs and credit, are sufficiently stable to convince the public that it's safe to take a chance again. Higher taxes thousands of miles away likely won't be enough. Conrad de Aenlle writes from Los Angeles about investment and personal finance issues. His blog on contrarian investing for MoneyWatch.com, "Against the Grain", can be found at http://bit.ly/NjaBa