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I think this is the following layman's assessment
US Crisis Model -
1) Government Pushes Expansion of Housing as it sits on huge surplus/potential surplus. Keeps interest rates low for borrowers
2) Lenders fresh with bulk funds from investors and low interests push both consumers and constructors. (initially follow all regulations) Steady growth in prices of property
3) Once responsible borrowers have bought houses/property - Greedy Investors, Greedier Realtors push prices higher - and entice borrowers with poor credit history to buy houses. Investments Banks bet on these borrowers defaulting through Credit Default Swaps and Collateralize Debt obligations
4) At the tip of the bubble (mid 2006), the frenzy of buying starts faltering with the irresponsible borrowers (who bought in the 90s) start defaulting. As homeowner defaults increase, demand slumps due to lack of growth in economy, flood of cheap foreclosures in the market push down prices.
5) Even good houses and responsible borrowers start feeling pain as bad borrowers brought down all real estate asset prices. (with many of them also either forsaking the house or short selling for a loss)
- this results in IBs and insurance cos to forcefully pay the CDS and CDO - making them insolvent.- BAIL OUT BAIL OUT
BOTTOM LINE for US market
Borrowers (end users who bought houses) started defaulting because they owed banks more money than the value of the house.
Dubai Crisis Model -
1) Government of Dubai entity/organizations plan grandiose development for the city.
They evaluate the scope and possible returns and borrow money from investors to construct projects via contractors. The entity backs it up saying never decreasing oil prices will make Dubai a productive hub. So the valuation of property is based on increasing oil prices.
Update1 - Someone corrected me saying Dubai does not have oil, but the other emirates do! So Dubai just projected its potential based on the neighbors riches :)
2) Initially some sales of these projects pick up due to marketing etc. But once the credit crunch hits western world potential buyers start declining. Oil prices tumble to a point where Dubai can no longer fund projects with oil money (which it does not have - but was promised by neighboring emirates), so it steps up borrowing hoping for recovery.
3) With no buyers, and stagnant prices, there is no scope of paying back the borrowed investment money to the lenders by the Dubai world, etc entity. Dubai asks for 6 months moratorium on payments.
Companies are worried that even after 6 months, the huge amount of unoccupied real estate in Dubai will simply remain in present stagnant state. (Dubai govt/Dubai World cannot reduce prices as it will cause a downward spiral just like USA and cause present occupiers to forsake their places as nearby locations will become dirt cheap - at the same time, tight money supply is not bringing in new investors to buy Dubai property at current prices)
4) Renegotiation of Debt fails - and the Entity cries default ...
BOTTOMLINE - Dubai
In this type of crisis, there is no end user or home occupier/office lessee involved - the Debt of the constructing entity itself causes the default mess.
There are fears that Malaysia, Shanghai and of course Mumbai are having exact same models of construction - where some entity entices investors and promises huge returns and later finds out no one wants to buy whatever was built.
I am not an expert at all this but is my assessment correct?
Where is India's bubble position wrt these 2 scenarios - all thoughts appreciated
- Outcomes -
1. Global Commercial Real Estate crash - Ruled out - Emerging market Commercial Crash ??
2. Gulf Government Bailout on Oil Bonds - Abu Dhabi is unwilling as the UAE is not really United :P
3. Collapse in oil prices due to surplus from Russia, Nigeria, Venezuela and Iran - Keep checking oil futures
4. Definite yes - cost of insuring against default by High debt nations like Ireland, Bulgaria, Greece, skyrockets
दुबई = डूब-गई
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