The Impact of Economical Changes in the Construction Industry of UAE (Dissertation Review Sample)

The Impact of Economical Changes in the Construction Industry of UAE
Introduction
The construction Industry in the UAE is majorly influenced by the finance allocated. Trending in significant time periods, political stability, and high rental yield dictate the construction Industry thrives. According to Reuters (2014, para 2) the economy is the largest contributor, to the construction industry. Reuters (2014, para 4), identifies lending capabilities of financial institutions to be the dynamic factor causing inevitable change in the market. Though these changes are distinctly different to and involving asset pricing and the economic order of the UAE, they impose greater danger for the risks involved.
According to Yuen (2014, para 1), the United Arab Emirates have enjoyed a recovery of Economy since 2010. The flourishing economy is due to trade, tourism and improvement to the service sectors. An increase in GDP due to the rising economy led to a multiplication of investment opportunities in the construction market and the tourism hub. For this reason, it directly attracted a direct investment to foreigners who whose fund in the industry is twice the amount it had secured earlier. Yuen (2014, para 2), further highlights that boost in the confidence of investors influences the construction market bubble greatly. With the booming construction industry, offering various opportunities in construction-related sectors such as architecture, led by the local investors, the United Arabs Emirates’ economy was strengthened.
The construction market of United Arab Emirates was thriving, just before it hit a setback in the year 2008. According to Hamann & Al-Hajj (2011, p. 222) the major contributing factors that made it prosper were; the design, procurement, handling of materials and the operations involved in the construction industry. Establishing the major influencing factors such as time, cost, quality and safety closely linked to its success story, defines the base of this project. The construction market bubble during the year 2008 made the United Arabs Emirates government introduce a set of measures that were preemptive, whose aim was to dissuade property speculation fending off potential investors. These were the greatest hit back in the country’s economy. The economy surged to the extent of having an overwhelming debt crisis. Judicious approaches were the only solution to integrating a stable construction market in the predetermined country’s economy.
Other surrounding countries in the Arab nations were affected by the decline in the construction market (Reuters, 2014, para 5). Considering the significant, thrive in the industry, Dubai announced a market crash that symbolized the impact on the economy. However, this experience reevaluated company policies in the country which set the base for the current property boom in 2012. Though the construction industry dealings in the market have not got to the pre-crash peaks, policies on impressive cues need to be put.
A number of construction projects initiated in the construction market, such as hospital development projects and schools, were essential for the growth of the sector, (Reuters, 2014, para 9). For instance, the World Expo 2020, will capitalize in the tourism hub, attracting foreign and local investors. Various measures have been created to make attractive packages for investors, making property market more open.
Similar studies in the United States conducted by Byun (2010, p. 15), indicate that the deterioration in their economy resulted in massive effects attributed to in the United Arab Emirates. These majorly include employment, which is dependent on a country’s economy and loss of homes, decreased security and fluctuation in the house, set prices. Therefore, lack of sustainability in the construction market, results to a significant bloom that not only affects the market, but all sects and stakeholders involved in the industry.
Reasons for the construction Market Bubble.
Construction bubble, a boom and bust industry is a dictate of the economy. Its inflation is majorly influenced by contractors’ market prices, a prescription of the rapid growth rate, the contracting capacity and government imposed regulations.
Credit Crisis
According to Holt (2009, p. 123), the major cause of the market burst and bubble is the credit crisis. The flow of foreign saving into the United Emirates Economy of the mortgage market overshadowed the foretelling of this crisis, (Holt 2009, p. 124). In his Study, Holt identified that problems would have been detected long before the crisis; the subprime loans had earlier deteriorated for several years. Critics outline the rising home prices as the mask behind it. Sowell (2009, p. 189), identifies the government to be the major contributor in the bubble. The housing market restriction was due to the government restrictions on the available land isolated from housing. Sowell establishes that, finances, which fed the housing bubble, were from the shadow banking systems, unregulated by the government. The major factors leading to this housing bubble crisis include; a relaxed mortgage lending standards, increased debt-to-income ratio for households, short-term interest rate policy and bank imposed leverage.
Low mortgage Interest Rates.
According to Group (2008, para 9), mortgage rates have fallen since 2007, with local banks following the lead of the UAE central bank. These cues are all drawn from the United States Federal Reserve. Following this scene, the UAE closely followed the United States monetary policy. Banks gave loans to customers with bad credit history, lacking the ability to pay. The increase in rates consequently led to the overcharging of customers, which led to the financial crisis. Inflation was the key concern to UAE. Investors sought for investments providing good returns with low risk. Foreign investors assumed that the securities were low risk.Byun (2010, p. 225), states that low mortgage interest rates contributed to the construction bubble by keeping monthly mortgage payments affordable for a significant number of buyers though prices rose.
Low short-term Interest Rates
The lower short-term rates contributed to the housing bubble in two primary ways. It encouraged the use of adjustable rate mortgages since home prices escalated faster-superseding household incomes. As a result, many prospective buyers were unable to afford house payments under fixed rate mortgages. When housing in the construction market heated up, mortgage vendors became creative, choosing standard payments. Investors were encouraged for leveraging since they could increase their returns. This burst of the housing bubble increased foreclosures causing the close of mortgage-backed security, (Sowell, 2009, p. 236)
Relaxed standards for mortgage loans.
Government policies encourage home ownership. Standards of mortgage relax majorly influenced new policies of home-ownership. According to Byun (2010, p. 5), increase in home ownership among the lower-income households led to a spike in competition in the mortgage loan market. The increasing security of mortgage debts and irrational exuberance engulfed the mortgage lending process. Standards reduced, undermining the incentive of responsibility in the mortgage market.
Irrational exuberance
These played a critical role in the housing bubble. The parties involved were certain that home prices would continue to rise in the construction market. This assumption led to gradually rise, that affect decision-making in the market industry. Foreign investors put billions of dollars into the highly rated mortgage –backed securities. Conversely, insurance companies continued to sell credit swaps, with the knowledge of little liability if home prices kept rising. According to Holt (2009, p. 124), irrational exuberance occurring during price bubbles is hard to recognize, hard to avoid, and not necessarily advantageous to avoid. Housing investment has been good until just before the peak of the bubble. As soon as the home prices started falling, mortgage rates started rising leading to the financial crisis. Financial systems like insurance companies, foreign investors, Investment banks and mortgage lenders resulted to incur losses.
Holt (2009, p. 126) further confirms that the housing bubble has a negative effect on the economy. Home construction being an important economic activity, its decline reduced the GDP. In addition, home prices reduced the household consumption focusing on the wealth effect. However, the bust in the housing bubble caused severe harm certainly not predicted.
Inappropriate investments
After the UAE central bank massively pumped money into the economy in 2007, damages were an attribute to private banks in...