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One of the really interesting things about the financial crisis is just how wrong it has shown many of our preconceptions to be. Allan Greenspan admitted as much the other day when he said he was shocked that things have turned out the way they have.
Here's another one: Last year, when the U.S. economy first started slowing down, de-coupling was all the rage. The idea that just because we were in trouble, emerging markets like China, or India, or the Persian Gulf were somehow immune, because they now trade with each other not just Europe and the United States. Wrong again. Which brings us to Dubai, once the booming success story of the Middle East.
Kelly McEvers reports.
Dubai already has the tallest building in the world. But at a recent real estate showcase, the spokesman for a major developer announced plans to build an even taller tallest building in the world.
Announcer: Cityscape 2008 is looking up, up and even higher...
The new skyscraper will be financed by the government and will climb to nearly two-thirds of a mile high.
Announcer: And will be opening in 10 years time.
This is how it works in Dubai. You announce plans for a flashy new building. Then you sell units in that building before ever breaking ground.
Your buyers come from all over the world. One thousand families move here every month to work in tech, health care, financial services and shipping.
Foreigners were first allowed to buy property here back in 2002. Since then, values have increased 20 to 25 percent each year. But now, for the first time, that bubble is starting to burst.
Achmed Salozai came here two months ago from Pakistan to sell real estate. He's showing me a photo of a studio apartment in an up-and-coming area of Dubai that his company is trying to sell. I ask him how much it costs.
Achmed Salozai: Two hundred thousand dollars.
McEvers: For a 450-square-foot apartment?
McEvers: That's a little bit cheaper than New York Manhattan prices.
And that's for an unfinished apartment that overlooks the desert.
McEvers: If you were trying to sell me this place, what would you tell me about it?
Salozai: I mean, I would not try to sell this to you because I don't like this property.
Not only does Salozai have too many properties he doesn't like and can't sell, but the company he works for has stopped paying him a salary.
Instead, they've promised him a higher commission on future sales.
Salozai: But with the market situation and everything, we're not being able to sell. We haven't been making any money.
That's because Dubai's real estate is in the middle of a sharp correction. Property values are plummeting and new buyers are scared to enter the market.
Those who have already invested in real estate here are starting to pull out because of the global economic crisis.
Tariq Khan heads a Dubai-based real estate investment group.
Tariq Khan: For example, we've got several clients in the U.K. who are extremely highly leveraged in the U.K., and now they're feeling that crunch. It makes more sense for them to sell the properties that they were buying for cash here to take care of the leveraged properties back home. And that's what's causing the correction here.
This all begs the question, will flight from the real estate market really make a difference in this part of the world, given huge oil reserves and massive sovereign wealth funds? Yes, says Chris Davidson, professor at Durham University in the U.K. Dubai is part of a larger country called the United Arab Emirates. Its neighbor, Abu Dhabi, is actually the emirate with all the oil and all the cash, Davidson says.
In other words, big brother Abu Dhabi might have to bail out little brother Dubai and that means we'll hear a lot less about Dubai and a lot more about the United Arab Emirates.
Chris Davidson: If the Dubai economy is bursting, if the bubble has burst in the last few months, one might find the United Arab Emirates federal brand being resurrected, as Abu Dhabi can step in and perhaps rescue developers or banks in Dubai.
Davidson says because this place relies on foreign investment, confidence in the brand is everything.
Davidson:Should any confidence be lost, whether over security concerns or confidence in the economic model, money would flow out, one would imagine, just as quick as it flowed in.
Davidson says he doesn't see foreign investors pulling out completely from Dubai. The question is, will their confidence in the place remain a mile high.
In Dubai, I'm Kelly McEvers for Marketplace.