Is Dubai facing another looming property bubble?

The volume of real estate deals has not reached its pre-crash peak but demand is showing signs of slowing

"Keep calm. There's no bubble", proclaimed a giant poster on a 40-storey building overlooking a Dubai highway, advertising a property finding portal late last year. That may have been true at the time, but the risks are rising.

A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real estate projects in the last few months, after cutting back sharply in the wake of Dubai's 2008 crash.

At the same time, property prices have been soaring on the back of Dubai's economic boom, increasing the chance of the market rising to unsustainable levels.

Surging supply and unsustainable demand are a risky mix - the same combination that got Dubai into trouble six years ago, forcing state firms to reschedule tens of billions of dollars of debt and jolting financial markets around the world.

This time, authorities say they are aware of the dangers, and they have taken regulatory steps to slow demand growth. But the steps are still modest compared to those by other global cities facing the same problem, such as Hong Kong and Singapore.

"It's too early to be calling top, but credit growth of that pace tells you that the cycle is accelerating rapidly," said Simon Williams, HSBC's chief economist for the region.

"Such a huge increase in lending is simply not consistent with economic order and stable asset prices. The time for policy action is now, before bubbles really get going, not when they are already in place."

Dubai house prices posted the fastest year-on-year rise of any of the world's major markets in January-March for the fourth straight quarter, soaring 27.7 percent, consultants Knight Frank said. Rents rose about 30 percent on average in the same period.

The value of real estate deals in Dubai, with a population of 2.3 million, jumped 38 percent in the first quarter to some AED61bn ($16.6bn), the Land Department said.

There are good reasons for property prices to rise, including annual economic growth around 5 percent and inflows of money from Arab investors seeking safety in a turbulent region.

While some prices have almost returned to their pre-crash peaks, they are well below some other global business cities. Prime real estate in Dubai costs between $6,200 and $7,500 per square metre ($580-700 per square foot), against $27,600-33,700 in Singapore, according to Knight Frank.

The volume of real estate deals has not reached its pre-crash peak but demand is showing signs of slowing. Propsquare Real Estate said sales volumes so far this year were down about 25 percent year-on-year as prices become less affordable.

"The gap between what the seller is asking for a property and what the buyer is willing to pay is huge at the moment," said Parvees Gafur, Propsquare's chief executive.

Yet the Land Department described the first-quarter surge in real estate deals as "impressive" and looked forward to more.

"We expect the next three quarters to be similarly active, especially as this period follows the launch of a number of stimulating economic projects in Dubai and the disclosure of some of the preparations for the city's hosting of Expo 2020," said the department's Director General Sultan Butti Bin Merjen.

The government fuelled the current property boom when it announced plans, in November 2012, for a huge development including the world's largest shopping mall, over 100 hotels and a park almost a third larger than London's Hyde Park.

Meanwhile, most of the more than 200 man-made islands off Dubai laid out in the shape of a world map that symbolised the 2008 property market crash remain empty after state-owned developer Nakheel's near debt default in 2009.

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Posted by: Jonnie Millar

Many comments here fail to acknowledge that the value of property is realised by the price the market is prepared to pay for it.

If there is a buyer prepared to pay the asking price, then that's the market level; if not, then the price adjusts accordingly.

Posted by: SilverFox

To those who feel this issue is down to agents, I would say you are missing the glaring fact that owners of properties are the persons which set the price for sale or rent. I got out of the business as I was sick of dealing with Greedy owners and those who got burnt in 2008 and were trying to recover their losses. Yes there are agents which are unscrupulous but they are in the minority, why risk ruining a deal because your the greedy one, it doesn't make sense when your commission based. The problems are that the market needs real regulation, banks need to be sensible in lending, owners need to be realistic and buyers/tenants should live closer to their means rather than pushing the boat out to live in expensive areas. Everyone evolved in the market is responsible for it, maybe they should start working together to mature it rather than allow it to burst again.

Posted by: Best Practice

Commission based agents stoke the market to unsustainable levels of growth, seller receptive to high prices just see the dollar signs, mortgage agents on commission. It is all about short-term greed, smash and grab. Even some "international" brand valuers are on commission. Where is the best practice??

Posted by: andy

Agreed 100%. This is fuelled by commissioned agents who are paid by renters and buyers, where in order to reverse this ridiculous spiral, agents should be paid by landlords and sellers. RERA played this all wrong, and has done nothing to introduce internatinoal best practice to this market. I've lived here 10 years and see it all happening once again. The same coyotes chasing prey back then are still out there rounding more with the backward ugly sales tactics. The only difference today is that RERA courts are overwhelmed with complaints they helped create. It's a deep hole to dig itself out of and I'm afraid we're going to see this one pop with a fury comapred to the last bubble.

Posted by: Red Snappa

It is important to rebuild trust in the Dubai Property market after the last catastrophe, negatively affected many 1000s of investors, as in deliver what is outstanding and allow the market to grow steadily.

With huge and game changing political tensions mounting on Dubai's doorstep in the region, it is even more important to impose proper rather than partial controls on speculators.

For example, the UAE Central Bank's original proposed mortgage loan-to-value ratios should be implemented, plus a punitive sliding scale of percentage charges for resale of properties mid-build cycle. Disregard bank protests. Indeed, only if a property is built, agreeably snagged and handed over should it be allowed to be sold without restriction.

The problem is that Dubai's property market was built on speculation and old money-spinning habits die hard.

Yet given the dangerous scenario in Iraq linked to Syria and now mandatory military service in the UAE, a large flight of capital could easily occur.

Posted by: Jasper

Banks create money by loaning it out of thin air in to exsistence

So Boom, Bust, Repeat - Boom, Bust, Repeat is the Business model of Bankers

Its how the Bankers and their elite insider friends end up owning everything for cheap!

Look at the Property markets in Greece, Cyprus, Spain, Ireland, Portugal, Florida etc etc etc

Unfortunately history says that Dubai will be no different as all those that have came before it, Dubai has already had one Boom, Bust and now its repeating

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