Dubai house prices heading for correction

JLL report says market unsustainable

Residential house prices in Dubai are increasing at an unsustainable rate and may see correction over the next 12 months, a report by property consultancy Jones Lang LaSalle (JLL) said on Thursday.

House prices in the emirate have climbed more than 22 per cent over the past year – higher than any major global market – as billions of dollars of government real estate projects triggered a buying binge and stock market bull run that has caused concern at the International Monetary Fund.

“The rate of increases seen over the past year is indeed unsustainable…while residential prices and rents will continue to increase over the next 12 months, the rate of increase will decline somewhat,” the JLL report said.

The surge has largely been driven by speculative buying, JLL said, noting: “Such rates of increase cannot be supported by the fundamentals alone.”

Data from the Dubai Land Department shows 80 per cent of real estate sales in the first half of 2013 were cash transactions, suggesting the speculative buying that the emirate witnessed in the previous boom period is regaining traction.

Dubai’s property market prices collapsed by over 50 per cent in 2009 after the global economic crisis. The IMF warned in July that overspending could leave Dubai vulnerable to another debt crisis if global market conditions deteriorated.

JLL’s report suggested the current overheating would be tempered by new regulation, significant house supply and developers being less dependent on pre-sales.

Dubai said last week that it would raise the registration fee charged for real estate transactions to four per cent from two per cent to prevent excessive speculation in the property market. The government is also working on introducing mortgage limits for expatriate and local investors.

About 45,000 new housing units are expected to be delivered in Dubai before the end of 2015, representing an annual increase of around 16,000.

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Posted by: cascades

this article is nonsence. the biggest indian politicians have invested here. prices will never crash.

Posted by: PPM

What a laughable comment. I'm sure Indian politicians, big and small, had plenty of investments here prior to the last crash. Even though they might admire your sentiments I'm pretty sure they and their accountants would have to dispute your grasp of recent history.

Posted by: Katie wilson

I don't get it?

The argument that buildings will only last 20 years in Dubai is simply not true- and looks like an attempt at scaremongering when used.

The argument that Dubai's poor legal framework, endless land supply and sudden u-turns in policy can make it difficult to quantify your risk is absolutely spot on.

One thing for sure is we have exciting times ahead, fun time to be an observer!

Posted by: Mark Renton

I don't think TCG means the building willphysically fall down after 20 - 25 years, it's more a case that it will require increasingly expensive maintenance and/or the physical appearance will degenerate to the point where it is no longer an attractive prospect for the existing investor. By analogy, you will get rid of an old car when it starts to cost a lot of money to keep it running and the styling looks dated. It doesn't mean it doesn't actually run any more - a budget driver will buy it as long as it suits their purposes.

If you look around Dubai, most of the tower blocks that are 20-25 years have been allowed to fall into a poor condition, and eventually there comes a point of no return where the landlord could not restore it to good condition even if he wanted to. So absolute minimal maintenance is done, with the tenants changing from exective families to lower class families and eventually bedspace until there comes a point where it is better to knock it down and start again

Posted by: Wildwine

@Sam, so currencies are over-valued but real estate denominated in those same currencies are not??? Really does not make sense to me!

Posted by: Wildwine

@SAM, sorry you are now talking of Argentina & Iran, these were not strong currencies, their currencies were devalued against the USD.
In your argument you are talking of Dubai Property, which is denominated in AED (pegged to the USD). If, as per your argument USD is over-valued as a currency, then all assets priced in USD necessarily become over-valued. Hypothetically, If I sell my Dubai property, I get paid is AED (pegged to the USD), I will be sitting on a pile of cash (which has a lower real value). Your argument may hold in case AED is not pegged to the USD.
@Consultant, I do not think US government will want to devalue too much, especially with them holding so much of USD assets in their books, thanks to continuing asset buying of 85B p.m. However, I too do not believe the conspiracy theories.

Posted by: SAM

@Wildwine, hyperinflation in Argentina and more recently Iran saw the underlying currencies drop in value, but real estate remained robust and in real terms increased in value. The increase in real estate valuations is a manifestation of a decline in the real value of the underlying currencies. Cost reduction due to cost cutting and innovation have shielded the true extent of inflation so far with regards to production of most goods, but in areas where such cost reductions are negligible, such as education, real estate and to some extent the oil industry, prices and valuations have increased. Expect real estate prices to continue to increase, but remember, not all assets are created equal.

Posted by: The Consultant

I have read those articles, also some other great ones about the 9/11 attacks being a CIA plot, the mafia taking out JFK and I've even seen a news story about a London bus being found on the moon. There's a lot of stuff out there, so be careful what you read....

But seriously, why would the US Government want to prop up it's currency? That's the last thing they (and most other governments) want to do - they are all in a race to devalue as far as possible and make their exports competitive. If they wanted to prop up the USD, all they would have to do is raise interest rates or cut back on Quantitive Easing. You don't need to go to war to defend the USD.

Posted by: SAM

With what is going on globally, it makes sense to invest in fixed assets, and realestate is one of the most practical choices. This is happening all over the world and not just Dubai. Currencies in most advanced economies are over-valued, since governments have been either directly printing money or indirectly increasing liquidity by purchasing non-performing assets, while interest rates kept artificially low. Sure it worked well so far, but it is simply kicking the can further down the road. There is a serious risk that currencies may globally collapse, which means inflation may come in the same way it did in late 1970's, but for different reasons. Cash or equities are at risk, if currencies collapse. Historically, realestate has retained its value over time. People with cash try to invest the way they believe is best, given their risk appetites and perception. Investing in Dubai realestate is one strategy that may very well safeguard your asset value, so go ahead and buy Dubai

Posted by: Happy Dubai

@Stephan@telcoguy I feel bad for you as you missed the boat to be rich and got frustrated at others. To the contrary of what you said, I am extremely happy and enjoyed every bit of investment in this beautiful country. Am I taking a risk? you bet I am and always will. In the meantime, stay in your cave (with a maple leaf in your flag) watching the history channel hoping a global collapse will hit the others. I hope you have some Telco cables to play with in your cave. Long live Dubai.

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