Chances of having a real estate market bubble in Dubai

By Priya Chetty on January 15, 2015

Real estate bubble is not new to Dubai. In fact, during 2003-2008, Dubai experienced one of the gigantic real estate bubbles in the world that ultimately busted during the fourth quarter of 2008 (Bertrand, 2012). Interestingly, the real estate market of Dubai is once again moving towards experiencing another huge bubble given the fast rising property prices within this region.

Hence, the economy of UAE (United Arab Emirates) is now being threatened by a huge potential real estate bubble in Dubai that can bring in various economic problems not only to Dubai but also to the economy of UAE as a whole. Since the prior experience of real estate market bubble in Dubai was not so good on account of its adverse effect on the UAE banking system (Bertrand, 2012), rapid rise in property prices has garnered huge attention from the government of UAE as well as economic experts from all over the world.

Current real estate market scenario of Dubai

Since a few years, mainly from 2011, Dubai has been experiencing remarkable growth in house prices (Standard Chartered, 2013). According to a report published by Standard Chartered Bank towards the end of the third quarter of 2013, after the financial recession of 2008, housing market had started to show some sign of recovery only from 2011 with selling prices and rent of villas posting positive sign of growth. According to another report published by Jones Lang Lasalle in 2014, the property market of Dubai had ended with a high note in 2013 with market prices rising at a rate of 22 percent year-on-year basis (y-o-y) on average. Moreover, during the same period rents had increased by 17 percent year-on-year basis (Jones Lang Lasalle, 2014). During 2013, the real estate market of Dubai also recorded high performances on recovery in prime and secondary locations in the city. The real estate market of Dubai maintained this momentum in 2014 as well. According to Knight Frank, the first quarter of 2014 (January to March) recorded the fastest growth in real estate prices year-on-year basis among all the major real estate markets across the globe for the fourth straight quarter by posting as high as 27.7 percent rise in price for this period, while rents increased by a remarkable rate of 30 percent on average during the same time (Cited in Dokoupil, M. and Menon, 2014). Another amazing thing to note during the first quarter of 2014 was the huge rise to the total value of deals made in real estate sector of Dubai in January to March, 2014. The total value of deals reached to a figure of $16.6 billion by making a jump of 38 percent (Dokoupil, M. and Menon, 2014).

Why are the prices rising so rapidly?

According to the report published by Standard Chartered Bank, the growth in real estate market of Dubai can be largely attributed to the improvements in fundamentals along with rinsing government regulations in this sector restrained growth in mortgage and lower level of off-plan sales (Standard Chartered, 2013). The report directly pointed out, how strong demand on the back of more improvised economic fundamentals has been working as a catalyst behind the growth in property market of Dubai.

Dubai has been experiencing high sustainable economic growth rates since 2011. Improvements in transport sector, hospitality and retail sector have been major driver behind this growing economy (Knight Frank, 2014). Increased economic growth has contributed to increased expenditure in real estate sector of the city and thereby posting a remarkable growth in demand in this sector (Knight Frank, 2014).

Moreover, the increasing population in the city on the back of rising economy has also been contributing to the growth in demand in real estate sector of Dubai and thereby playing a great role in increasing the property prices as well (Standard Chartered, 2013).A major factor of population growth in this city has been the fact that a big number of people from various nations across the world, mainly from the countries with unstable economic growth and political situation, has been migrating into this city (Standard Chartered, 2013). This has been mainly happening on account of the fact that amidst a region of economic instability and political chaos, Dubai has been maintaining status of economically and politically safe place. According to the StanChart report, on the back of increasing population, higher rate of school registration are reflecting the rise in families as end users or renters in the property market of Dubai.

Besides, the changes in the nature of government regulations in the real estate sector of UAE have also contributed to the increase in demand as well as prices in the real estate sector of the region. Improved regulations in the form of more transparent and better regulatory system have increased confidence among the investors in this sector by bringing in more safety measures for them as well as making the contractual process more favourable towards the investors (Standard Chartered, 2013). The new regulations have helped to gain more investors in the real estate sector of Dubai by improving corporate governance practices in the form of safeguarding the investors’ right to property.

Another major reason behind the soaring demand and prices in the property market of Dubai has been Expo 2020 (Knight Frank, 2014). Dubai has won the race of hosting Expo 2020 and this win is predicted to add further growth in the economy of the city that will in turn is expected to boost the real estate sector as well.

Is Dubai actually heading towards a real estate market bubble?

2002-2008 saw the generation of a property market bubble that busted towards the end of 2008. Given the continuous growth in real estate prices since a few years in Dubai, the evident question is whether Dubai is actually heading towards another bubble in the real estate sector. Given the current trend in real estate prices, it seems that a bubble in this sector is highly probable in near future. Money has enormously been being poured into the real estate sector of Dubai. The major investors have been the rich migrants from Arab Spring nations, European countries, etc., who are entering into Dubai to escape from the economic and political turmoil in their nations (ArabianMoney, 2013). These people are building their new roots in Dubai and hence investing in the property markets. They mostly want completed property and hence there has been a boom in the construction of new properties. Along with the demand of new migrants into the city, growing economy of the city is also boosting the demand of properties significantly and ultimately resulting in tremendous rise in prices.

So, one now may ask when the market would crash or when the bubble would burst. The phenomenon of continuous rising price has started mainly from September 2011 with the signing off of $25 billion World debt rescheduling for Dubai (ArabianMoney, 2013). Now, the rate of rise in prices have now been hovering at up cycle level where in real estate sector cycles are generally happened to be of three to five years (ArabianMoney, 2013). Now given the rate of growth in prices, the real estate market of Dubai has not been on the up cycle level for much more than twenty months. Moreover, the prime property prices in Dubai are still quite less than the global standards (Knight Frank, 2014). According to a report published in the web portal of ArabianMoney, it might take about two to three years more for the sector to move into a bubble and consequent bubble burst given the current and expected rate of growth in the economy and consequently in the growth of prices in the real estate sector of Dubai.

References

  • Kinght Frank. (2014). Q1 2014: Dubai Prime Residential Review. Abu Dhabi: Knight Frank UAE Limited.
  • Jones Lang Lasalle. (2014). Dubai Real Estate Market Overview. Abu Dhabi: Jones Lang Lasalle IP Inc.
  • Bertrand, R. (2012). Real Estate Bubble and Financial Crisis in Dubai: Dynamics and Policy Responses. Journal of Real Estate Literature , Vol. 20, No. 1.
  • Standard Chartered (2013). Dubai housing: Fundamentals not speculation. [Online] Available at https://research.standardchartered.com/configuration/ROW%20Documents/Dubai_housing__Fundamentals_not_speculation_04_09_13_01_29.pdf [Accessed on 4th January, 2014].
  • ArabianMoney. (13th April, 2013). Is Dubai heading for another real estate bubble and crash? [online] Available at http://www.arabianmoney.net/banking-finance/2013/04/13/is-dubai-heading-for-another-real-estate-bubble-and-crash/ [Accessed 5th January, 2014].
  • Dokoupil, M. and Menon, P. (June 15, 2014). Dubai faces moment of truth over looming property bubble. [online] Reuters. Available at http://in.reuters.com/article/2014/06/15/uk-emirates-dubai-property-idINKBN0EQ08320140615 [Accessed 3rd January, 2014].
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