24 March 2016

Dubai: The Zeitgeist of ‘Animal Spirits’

‘Animal spirits’, originally coined by John Maynard Keynes, guides human behavior by inserting unpredictability into market cycles. A prominent example of ‘animal spirits’ effects in the real estate market was the run up to winning the bid for the World Expo Event. Prices escalated by 40% till the run up and another 20% after the win. A closer look of the price hikes reveals that the largest increases transpired during times closer to the announcements and immediately after the win.

There is a lag effect between the tone of the media and the realities of the market. In mid-2014, when the majority of articles were preaching optimism and further prices hikes, the market index had already begun to plateau and fall. Overall, the media should not be used as a tool to detect inflection points and a turnaround of the market.

Historically, capital markets have been used as a leading indicator to measure future health of the economy. The recent spike in equity values on the DFM has followed closely by rising real estate transaction values and bottoming out of prices. Whilst it is too early to state whether an inflection point has been reached, it is valuable to note the symbiotic relationship between capital markets and real estate values.

Decisions driven by ‘animal spirits’ and the media usually cause the investor to get trapped in herd mentality, and consequently blind them from seeing the inflection point in the market. In order for investors to better gauge market conditions and inflection points, a deeper analysis is needed to assess the real value of the assets.

To download the full report click here: http://blog.reidin.com/PublicReports/UAE160325_1.pdf