Property prices rising on money supply growth

MANAMA: High real estate prices in Bahrain could merely be a result of continuous growth in the country's money supply and not an indicator of any kind of economic boom, says a Bahrain-based economist. Bahrain Economic Society member Mohammed Habib Ali warns that a global increase in money supply has caused asset prices to increase, forming a false sense of economic growth.
"Thanks to the American strategy of increasing its money supply to avoid a harsh recession and to painfully try to pay off its deficit, the entire world has now caught the same disease," he writes in his latest study.
"Since Bahrain adopts a peg to the dollar and therefore a peg to the American growing money supply, it is not surprising that ever since 2001, real-estate prices in Bahrain have been outgrowing those in Switzerland.
"Properties in Dubai are also catching up to the expensive Japanese real-estate market."
Mr Ali says that many countries around the world are increasing their money supply at a rate far greater than that of their real gross domestic product (GDP) growth and says rising real estate prices is being fuelled by the fact the supply of assets is relatively limited when compared to money.
When money supply grows faster than real GDP growth, inflation is likely to follow.
"Why are we experiencing such increases in the cost for education, housing, health services, food and energy?" he asks.
"The answer is a worldwide increase in money supply. As a matter of fact, true and genuine economic growth should mean declining prices for most goods, due to constant improvements free trade, cheap labour, rising productivity and technological advances.
"Thus, if money supply was tamed, people's savings should actually be able to buy them more and not less economic goods in the future and after all that is the whole point of saving money.
"As I see it, high inflation is becoming a global phenomenon due to most central bank's unprecedented increase of money supply and most asset prices becoming highly inflated globally.
"I see that energy, precious metals and agricultural commodities are still inexpensive in real terms, especially when compared to financial assets and real estate."
Offering what he calls "words for the wise and patient investor", the economist advises people to invest in natural resources, including precious metals such as gold and silver, which he expects to experience long-term appreciation in the face of high demand from India and China.
Explaining his reasons for such a prediction, Mr Ali cites a continuous increase in global monetary inflation, what he calls an "alarming" US trade deficit, the ongoing devaluation of the US dollar and ever increasing demand for energy and natural resources in developing industrial countries which are now "the workshop of the world".
He also predicts rising interest rates in many developed and developing countries will ignite an unavoidable downturn in real estate markets, and that ever increasing demand and shortage in the supply for natural resources will lead to increasing worldwide political instability due to continuous battles over these resources.
"I still see the long-term future outlook for precious metals to be extremely good," says Mr Ali.
"Looking at the demand side, one must also remember that most of the developing world is accumulating large foreign reserves in currencies and they are looking to diversify.
"For an example, China is now sitting on over $1 trillion in reserves and has recently decided that it is considering investing $200-300 billion of that in "strategic assets".
"What do you think that is? The answer will most likely be gold."
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