REALTORS and economists generally agree that the Government's new real estate controls may deflate the property bubble but that the first effect of the move will be to make wealthy non-Bermudian property owners even richer ? precisely the opposite of what the controversial new policy was intended to achieve .

A leading realtor pointed out that the immediate reduction in the supply of high-ARV properties available for purchase by non-Bermudians should have the inevitable consequence of raising the value of such properties already owned by non-Bermudians, and decreasing the value of such properties in the hands of Bermudians.

"And we are not selling to non-Bermudians; of the 16 properties in the category available to non-Bermudians sold in the last two years, 13 were sold to Bermudians," said the realtor, who spoke on condition of anonymity.

"But if you imagine two identical properties side by side, both estimated to be worth $4 million last week, one owned by a Bermudian, and the other by a non-Bermudian, the Bermudian property is worth less today, and the non-Bermudian worth more."

Economists Bob Richards and Bob Stewart made comments to similar effect, and pointed out that Government efforts to intervene in markets by attempting to control prices or demand were rarely successful.

"It is certainly a possibility that this will prick the (real estate) balloon," said Mr. Richards. "I think that 'top-slicing' the market, in the way that the Government has proposed, will certainly have a dampening effect on the high-end property available to Bermudians, but it will do nothing to change the availability of housing for low-income people. It will not affect the real problem."

Mr. Richards, investment adviser and president of Bermuda Asset Management, also believes that the Government action may expose Bermudians to the economic consequences of diminished expectations.

"We have seen internationally that while nobody really likes inflation and it can be a dangerous thing economically, it can't compare to the dangers of deflation," advised Mr.Richards. "I don't think anybody is going to be happy if the price of real estate turns down too far; the problem with falling prices is that you never know where they're going to stop.

"The whole issue of financing property becomes problematic in falling markets. Suddenly, banks can't be certain of the relationship between the loan being requested and the likely collateral value of the property in question. If the value of collateral is expected to go down, banks are not going to be lending money.

"I think that Government's 'top-down' approach to making property more affordable is naive, because financing is going to be a real problem if prices nosedive. I am not predicting that, but it certainly raises the possibility that this could be a catalyst for a downward revision of prices.

"With real estate prices the way they are, the best that can be hoped for is a measure of stability over a long period that would allow incomes to rise and reduce the ratio of the average house price to average income over time. I think the (Government) approach here amounts to 'overkill', and that it could have been handled with more subtlety. If there's a problem with 'fronting', I think that it could have been addressed without cutting off access to foreign buyers."

Mr. Richards has warned repeatedly in recent years of the dangers that can be posed by overheated markets.

"The real danger here is that we have a 'bubble', which I have been talking about for quite some time, and there's always some catalyst which causes a 'bubble' to deflate. I don't know if this is it, but it could be.

"In the real world, bubbles don't deflate gently. As in every market, deflation tends to swing prices beyond the equilibrium; we had that with the stock markets in the late 1990s, and we still see the effects of that in Japanese stock and real estate markets. Deflation can persist for a long time."

Mr. Richards referred to the precipitous fall in the US Nasdaq stock market ? the index peaked at about 5,000 five years ago, and now trades around 2,000 ? and the Nikkei stock market in Japan, which peaked at about 39,000 in 1990, and traded this week at 11,600.

Japanese real estate has fallen for 14 consecutive years by a cumulative average of about 35 per cent, although both the Japanese stock and real estate markets appear to have stabilised recently.

"The Government action has caught everyone by surprise," said Mr. Richards, "and we need to keep a close eye on the effect it will have, but I am not sure that it has been very carefully thought through.

"The perverse thing about markets is that when you try to control one aspect, some other aspect gets out of control; you can't control price and quantity on offer at the same time. You might be able to do one, but not both! Historically, governments around the world, not just this (Progressive Labour Party) one, haven't really taken that to heart."

However, Mr. Richards is not optimistic that historical experience will cause the Government to reverse its decision to create a more protectionist property market with a broad and clear divide between local and foreign-owned properties.

"Politically, that's not likely, but if this is a policy aimed at deflating the price of property in Bermuda, then I think the Government should say so. The fact is that, in the last eight or ten years, we have not seen a whole lot of buying of Bermuda real estate by foreigners, nothing remotely like the situation in Barbados ().

Company director and economist Bob Stewart is less certain that the new property controls will burst the real estate bubble, but agreed with Mr. Richards that the Government may have fallen foul of the law of unintended consequences.

"It will certainly have the effect of redistributing wealth from Bermudians to rich non-Bermudians who currently own houses or condominiums," explained Mr. Stewart, "because they are able to sell to other non-Bermudians at a greater price than could be acquired from a Bermudian.

"Government, in its efforts to control the real estate market has, no doubt unintentionally, given a financial windfall to wealthy non-Bermudians."

Mr. Stewart is sure that it was Government's intention to increase the supply of housing to Bermudians and thereby reduce the price of property, but he believes that it is too early to predict whether it will have that effect in the local market.

"It is always hard to be sure of the likely outcome of an intervention, because participants in the economy may change their behaviour in ways that may overcome the intent of the Government. That's what is meant by 'unintended consequences'. No one can foresee how resourceful people may be.

"All other things being equal, the price of Bermudian properties that could have been sold to non-Bermudians before these new controls will certainly fall. Also, to some extent, markets run on confidence, and sudden Government interventions of this type rarely work; they cause people's behaviour to change, and by definition, the market itself changes."

Mr. Stewart pointed out that the Government had taken other actions that had the effect of giving assistance to the wealthiest non-Bermudians at the expense of all Bermudians.

"This has been a theme of the PLP Government; it actually subsidised the real estate development of Tucker's Point. By giving them a specific break on import duties about four years ago, on the so-far-mistaken assumption that it might lead to the building of a new hotel, (late Tourism Minister) David Allen subsidised a transfer of wealth from Bermudians to non-Bermudians.

"Effectively, this is what they are doing again. The PLP came into power intending to redistribute wealth from the rich to the poor, but so far they have only succeeded in transferring some wealth from the rich to the very rich."