Monday, July 28, 2008

Asset bubbles in Oman

The Oman Observer published a table of land prices in Muscat recently. The graph shows just how much the asset inflation bubble in Oman has taken off over the past few years, with land prices more than doubling in the past year alone.

The inflation in land prices has created a significant gulf between two groups of the Omani population: those who were fortunate enough or prescient enough to buy land and other real estate in 2005 or earlier, and those who didn't. Combined with the similar increases being seen now in building costs, there are many young and middle class Omanis who now struggle to get onto the housing ladder in Oman. As seen in many western countries over the past few years, the asset bubble has also been used to finance a huge boom in consumer spending; especially cars, education and holidays.

The resentment felt by many Omani who missed out on this boom is palpable, as not only did they not make hundreds of thousands of rials in property profits, they were at the same time hit by equally massive hikes in rents for the houses they were living in, hence the recent decree by HM to cap rents and plug the many loopholes for turfing people out of their accomodation.

Another effect of this boom has spurred many to speculate on the new estate developments in Oman, the Wave being a classic example, where the demand to put a deposit on a property has been overwhelming. The intent of this speculation is to place the small 5-10% deposit (usually with borrowed money) in the hope of then selling the as-yet-unbuild house on to someone else before the big payments are required. The returns for those who got into this game early were extreme, in excess of 1000%, as the Wave houses have for example more than doubled since the original phases were sold.

But clearly for some developments this boom may be starting to fade, as construction costs increase the original asking prices, and demand from the GCC citizens wanes in the face of more and more developments. Blue City recently talked of perhaps having to sell houses in discounted bulk lots to move enough of the off-plan villas and apartments to meet their bond commitments. Is this a sign that the bubble is starting to peak?

Hmmm. I hope the Government here takes note of the calamities evident in the US and UK recently, and acts to avoid a damaging collapse in prices and the subsequent problems for those speculating late in the game with borrowed money... But again with the retention of the fixed dollar link, its hard to see what they can do. Perhaps a large stamp duty placed on houses or land sold after less than a certain period would help calm the fever in the market?


  1. Maybe a tax on those who own more than 2 houses..

    Another worry is as inflation rates continues to rise, those with debt or who take out mortgages, will they be able to pay it off? are we gonna end up with a mortgage crisis like in the US? especially with salaries remaining the same and currency pegged to the dollar.. I'm no expert in economics, but just some concerns based on my limited knowledge of the issue..

    Intersting topic!

  2. 1000% return! not likely that would make a flat cost over a million rials.

    As for land values, owned land is only worth what it can be sold for and i highly suspect that most land owners only speculate that their land has increased 100%+ while what they could achieve (and is being achieved) is much much lower.

  3. r
    not a bad idea.

    No, you're wrong. The math is pretty simple. Example: I pay a 10% deposit on a 150,000 rial villa off-plan. I later sell the villa for 300,000 rial (before its built), making a 150,000 rial profit on a 15,000 rial investment. 1000% profit.

    And use a nickname.

  4. There was news that Bahrain has become the best investment destination with lowest cost of living in the GCC. The survey claims that rent increase is lowest in GCC.
    Funny thing about these surveys is that they never reveal any numbers. House rent in Bahrain always used to be higher than other GCC countries, since US guys live in the city itself unlike in Oman where they are confined to Masirah. Cost of imported items is the same for all gulf countries. So how can Bahrain have lower inflation than other GCC countries?

  5. Inflation measurements are always fixed. It all depends how you calculate it, and there are many ways to change the number, depending on the weighting, the basket, how to correct for improvements in 'quality' (eg mobile phones, computers), etc.

    For example, Saudi just admitted its true inflation is really 20%+, but the headline number is much lower because they use the subsidised prices for many things(only available to Saudi nationals) in the calculation.


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