Housing Bubble in Dubai Returns

Housing Bubble in Dubai Returns

A flurry of recent news articles reported concern over the possibility of another housing bubble taking shape in the United Arab Emirates. Despite a crash in 2009 that sent real estate prices plunging by 65 percent, investors and property speculators have begun returning to Dubai with a renewed interest in residential properties.

Money is now flowing in from wealthy Arabs fleeing instability in their home countries, Europeans seeking a tax haven and Chinese escaping their own unstable housing market. After bottoming out a few years ago, residential prices have now jumped 18 percent in the first quarter of this year. But given the Dubai housing market’s recent past, some analysts worry about history repeating itself.

The last bubble began to inflate in 2002, when Dubai opened up its real estate market to foreign investors for the first time. This move precipitated a frenzy of investment and speculation, often on risky terms. Buyers snapped up off-plan properties (pre-construction developments), while banks offered mortgages for upwards of 90 percent of the value of properties. For several years, life in Dubai was prosperous. But in late 2009, with the bubble have having grown to unstable levels and world markets reeling from the global financial crisis, supply greatly outpaced demand, funding dried up and prices plummeted.

As early as November 2012, Bloomberg called attention to the risk of the Dubai property bubble becoming reinflated. At that time, banks had cut interest rates to their lowest levels ever, offering rates of around 4 percent, whereas interest rates had been up around 9 percent back in 2009. Meanwhile, banks have also been handing out mortgages with loan-to-value (LTV) ratios approaching 90 percent. In recent months, speculators have returned to Dubai, lining up in droves for property sale launches. These speculators are grabbing up units and then turning around to sell them with high premiums in a matter of days. These developments seem reminiscent of the activity that fueled last decade’s boom. As an additional reason for concern, the real estate broker CBRE reported in April that the number of property deals had dropped by almost 25 percent in the first quarter, indicating that the upward trending market could be getting ahead of itself.

Despite these causes for concern, there is reason to feel assured that another bubble and subsequent crash are unlikely to occur. It seems as though the financial community has learned lessons from the disaster a few years ago. Banks, for example, are undertaking much more responsible lending practices. They are doing a better job of sizing up potential clients and are giving mortgages to customers who actually intend to live in the property they are buying. There are also far fewer off-plan properties being sold. Meanwhile, the government has shown a readiness to provide greater regulation. As early as 2008, the central bank put in place a rule prohibiting banks from allowing real estate loans to account for more than 20 percent of bank deposits. Around the same time, Dubai established the Real Estate Regulatory Agency and a property court to provide further oversight. And most recently, the central bank is considering implementing an LTV limit.

Yale economist Robert Shiller’s extensive research on bubbles offers further reassurance when applied to the developing situation in Dubai. He has proposed that bubbles are often characterised by a “new era” story. In other words, investors buy into the allure of a certain opportunity. This was certainly the case during Dubai’s last bubble, with financiers salivating over gaudy high-rises and manmade islands. But because that house of cards collapsed, the Dubai real estate market is unlikely to captivate people’s imagination in the same way without recent memory serving as a tempering factor.

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