Question

Suppose rents in Dubai on an average 2-bedroom apartment are about 120,000 AED per year. The rents are expected to grow at 3 percent per year forever and long term interest rates are at 5% per year. If current apartment price is 20,000,000 AED, do you believe this price to be a fair market price? What can be said about the housing market under these circumstances?

5). Suppose you suspect gold price to have a bubble. Explain what to look for. If there is a bubble in gold prices and the bubble bursts, what is the bottom price you expect?

6). Suppose you are a Goldsmith and you want to become a banker. If the gold withdrawal rate is 20 percent, how much in total can you issue in gold paper receipts if you have 10,000 gold units?

Answer 1

	In AED
Annual Rental Income	1,20,000	with growth of 3% per year	1,23,600
Current Apartment Price	2,00,00,000	interest rate 5% per year	2,10,00,000
Ratio of Rental Vs Current Price	0.60%		0.59%

The Ratio between Annual rental and Current Market value is 0.60% which is less than the ideal Ratio of 0.80% - 1.10%.

This Market price is slightly higher than the fair Market price, Fair Market price should not be more than AED 15,000,000

With Rental increasing at 3% per year & Long term Interest at 5% per year, the Fair Market value is under pressure to maintain the ideal rate of 0.80% - 1.10%

5.If I expect a gold price to have a bubble, as a small Investor I should exit the market with price going up, build a cash reserve or wait for the market to fall post bubble and invest further in gold.

The bottom price should be $500 - $1000 per ounce which is the cost of digging gold from mine, and the gold is not expected to fall below this level

6. If I being a goldsmith want to become a banker, I can issue paper gold receipts equivalent to 2,000 gold units which can be exchanged by the customer against the gold deposited with the bank, 20% of 10,000 gold units.