Arabian stock markets are signaling a real estate crash

Therefore the tumbling stock markets of Arabia - which have all contrasted very starkly with buoyant global equity markets over the past year - should be a bold warning signal of weakness ahead for local real estate.

But let us dig behind the linkage between stock prices and real estate, why does this occur? One argument is that when share prices slump then liquidity moves towards real estate for a brief period as an alternative asset class, sustaining a boom until the same economic forces that depressed shares catch up with property.

Now in the context of the Middle East the reason for the stock market boom was mainly over enthusiasm about the future outlook for corporate profits based on a rising oil price. Too many buyers entered the market, bid share prices to unsustainable levels and the whole thing came crashing down.

Endless property schemes

Is this picture not also now found in many regional real estate markets? Instead of IPOs there are endless new property projects, with less and less information available for investors. More and more people are investing into less and less solid real estate developments.

It does look as though the same liquidity that flowed into Arabian shares has now shifted into property and is inflating values and encouraging a belief in projects that actually have no value until they are completed. Will property therefore follow shares as the next investment bubble to burst?

In order to argue the reverse you have to say that 'this time is different'. These are the words the great emerging market fund manager John Templeton called the 'most expensive in the English language' for to invest against past precedent is often a costly error.

Oil liquidity

However, the exceptional levels of liquidity created by the Third Great Oil Boom in the Middle East may present circumstances in which this could prove to be true. But this same argument was used to justify high Arabian share prices until recently and proved deficient. Will real estate be any different?

If oil revenues could not support Arabian stock markets, why should they support the real estate markets? Arabian stock markets have lost more than the annual GDP of the region in terms of market capitalization this year, and that is a shortfall that not even the oil revenues of the Third Great Oil Boom could compensate.

You only have to total up the incredible number of property mega-projects now being executed, let alone promoted in the Middle East to see that the same rule of thumb applies to real estate. The $1 trillion of property development being leveraged off the back of the oil boom is unsustainable, and a correction thus inevitable.

However, timing property corrections is difficult for even the best informed experts, and the Arabian real estate boom will be no different.