Dubai real estate risks sharp correction - report

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DUBAI FLAGSHIP: Property developer Emaar's share price has hit a three year low, while property prices have been rising. (Getty Images)

Dubai's real estate market increasingly faces the chance of a sharp correction as signs of overheating emerge, Saudi Arabian bank Samba said in a report released on Sunday.

"Signs of overheating are emerging, fuelled by expansionary monetary conditions and high oil prices," Samba Financial Group said in the report.

"This is raising the risk that a significant imbalance may develop over the next two years as scheduled new supply comes on to the market, increasing the prospect of a - possibly sharp - market correction."

Shares in Dubai property firms have plunged in recent trading sessions, with the biggest listed firm, Emaar, falling on Sunday by around 8 percent to hit a 3-1/2 year low.

Investors have fled the Dubai property sector in recent weeks in the wake of corruption investigations and confusion over visa rules for expatriate homebuyers.

Samba said it expected the sector to enter a cyclical weak phase in 2009-2010.

"Soaring property price increases over the last five years, have attracted increasing supply which will eventually exceed demand," the bank said. (Reuters)

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READERS' COMMENTS

Dynamics of a Bubble
Posted by Trojan on Tuesday 9 September 2008 at 22:26 UAE time


Perish, where did you get these numbers from? Only 5% of people get mortgages?! Demand is 40K units while supply is 20K units?! Demand is conveniently double the supply?! I don't know what the source of your statistics is, but if it is any government related or local bank source, I would say it is suspect due to the apparent conflict of interest.

|I would tent to agree with pretty much what Paul wrote, and he made excellent points. I would add to that my experience with the real estate and dot-com bubbles in the US. Look at the recent real estate bubble there, which reached its peak in mid 2006. In the world's largest, richest, and most diversified economy, there was no specific shock to the system or event that lead to the popping of the bubble. It all started with one mortgage bank announcing that it will be late on its debt obligations because borrowers of mortgages it was holding were late in their payments. From there on it was a continuous errosion in confidence that lead to more and more bad news and the continued slide in home prices. This is how bubble pop for the most part. In an asset bubble, fundamentals no longer hold, and it is only fickle human psychology that keeps them going. Therefore, any loss of confidence will quickly cause speculators to run away.

Add to that what Paul mentioned about the supply of money, which is beginning to quickly dry up in this region. But you don't even need that to cause a bubble to pop; the loss of confidence in the US real estate market caused banks to pull back, interest rates to shoot up, and credit to dry up. Some might argue the reverse, it is the usual chicken-and-egg story.

The Dubai government might well try to save the market, but I doubt they will be able to do anything about it - the bubble has run too wild for too long, and I predict that at some point they will prefer to cut and run. And I predict that the impact will not be contained to the real estate market, the financial system will be impacted severely (note HSBC's recent warnings). Local banks are heavily exposed to the real estate market, not just through mortgages but also through the loans they gave to developers. There too, conflict of interest played a damaging role. Local banks are government owned, semi-government owned, or owned by the same big fish that own the developers. Hence, transactions between banks and developers were not conducted at arms length. So don't be surprised that when the bubble pops, that will also lead to massive bank failures, with many depositors losing their money. Yes, it could happen, and that did happen in the US in the past - as recently as the Savings and Loans crisis of the 80's. That's why most people in the US with less than $100K open accounts with FDIC-insured banks, where the US government will gaurantee their deposits up to $100K.

Track record has shown that analysts and economists tend to overestimate the good news and underestimate the bad news. I am afraid it won't be any different this time.

And what about the UK differences?
Posted by Paul, Dubai, UAE on Tuesday 9 September 2008 at 11:38 UAE time


Paresh, you have pulled out the usual 'this place is different'. The basics are the same - massive expansion of money supply through overly low interest rates. Only 5% of purchases are with mortgages? But how much with borrowed money? Why are the bank stocks crashing and HSBC warning of exposure?

Of course, the UK arguments given as to why it would not crash were far more convincing:

1) The UK is a small island with a massive population, swelling from EU and other immigration. Limited land for development, zoning issues make it hard to get permission to build. Much empty land is zoned for agriculture etc. Economy doing well (before crash). Contrast this with Dubai, where there is no shortage of worthless desert and so they can build and build and build for the next 30 years and still not run out. Won't be a structural supply problem for decades, just a time lag for building.

2) People in the UK largely buy houses to live in long term so few will sell at a loss, they will just sit tight. Contrast with Dubai where people buy to flip in a few months, or at best, stay an average of 2-3 years before returning home. Dubai is not very sticky for expats.

3) The UK is an established market, with a democratic open system, full freehold title and rights of the individual against the government. Contrast with the UAE where the authorities can decide to build a motorway right next to you (or worse) and you can do nothing about it.

4) The UK has low inflation and a diversified economy. Compare to the UAE which has high inflation and an economy solely focused on a commodity and real estate market that have both bubbled excessively in the last few years, although the former is now dropping rapidly.

Alas the UK suffered the fate I predicted back in 2004.

As to the government being able to intervene to save the UAE market in the event of a crash - they said the same in the US and UK, where the % of the economy dependent on real estate and construction is far smaller. If you think a booming economy run by a controlling government justifies ever rising prices, you need to look at Singapore in the 1990s. 80% wiped off prices in 18 months.

Even in a 'good' economy, prices can get way, way ahead of themselves when speculators pile in. And Dubai is frankly full to the rafters with speculators. It cannot end well, such speculation never does.

price correction
Posted by paresh, dubai, dubai on Monday 8 September 2008 at 18:14 UAE time


Paul i see your point and agree with your reasoning as far as a mature market is concerned but there are differences here in U.A.E that mitigate the obvious as follows:-
1.Money supply is not a problem in the U.A.E. or M.E. due to surplus fund deposits from oil thus fueling internal growth.
2.Asia and in particular Sub- continent has alot of funds being invested in this region
3.Purchases through mortgages accounts for 5% compared to 70% in the U.K. and with a price correction, this market will grow and offset any supply.
4.Property market involves the government through its own coporations unlike the U.K. where the government has a hands-off policy.

A different perspective
Posted by Trevor, Dubai on Monday 8 September 2008 at 16:31 UAE time


I think that the whole demand/supply issue is missing the point. What is becoming clear is that a lot of developments that all these experts expect will be built will never actually make it to the top floor and some won't even break ground, so much for supply. Actually nobody really knows what demand should be either because any numbers bandied about are highly suspect and probably totally baseless.

The real problem will then be how to handle the fallout....glad I don't work for RERA.

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