Dubai Housing: Regulation To Ease 'Bubble' Fears
BMI View : The recent run-up in real estate values in Dubai will moderate over the coming quarters on the back of initiatives by the Emirati and Indian governments. The current run-up in prices is partly down to very low base effects as well as inherent demand, rather than speculation. We therefore do not believe Dubai is currently in a housing bubble that could wreak havoc on the scale seen in 2009.
We expect the rapid price increases in Dubai's real estate market to ease over the coming quarters and do not believe a bubble is forming that could jeopardise the emirate's economic growth. Housing inflation as measured by the consumer price index reached 4.8% year-on-year (y-o-y) in June, the second highest rate since 2008. However, this growth underscores the increase in prices experienced by most residents in Dubai as the composition of the basket excludes areas popular with expats, who account for 90% of the 2.2mn residents - namely the Marina and Business Bay which were still under construction when the basket was constructed in 2007. Private real estate companies such as Jong LaSalle claim rents have increased by 27.7% y-o-y in Q114 - the fastest rate of growth in any major city for the fourth quarter in a row, prompting fears of another real estate bubble. Given that real estate accounts for around 29% of Dubai's economy, any crash would have a significant detrimental impact on the emirate's economy, as was the case in 2009 when valuations on properties fell by around 50%, resulting in a corporate debt crisis and the emirate requiring a USD20bn bailout from neighbouring Abu Dhabi.
There are signs that the housing market is starting to slow, and we do not share fears that Dubai's housing market is a bubble poised to burst. Much of the recent run-up in prices has been on the back of low base effects as housing inflation only reached positive territory in Q213. The impact of low base effects is beginning to wear off since in Q214 transaction volumes on properties were 10% lower compared with the preceding quarter and approximately 28% below a year earlier. Therefore, price data for the latest quarter are likely to show a slowdown in inflation when released.
|Dubai Inflation To Moderate|
|UAE - Housing Price Inflation By Emirate % chg y-o-y|