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

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.

Dubai Inflation To Moderate
UAE - Housing Price Inflation By Emirate % chg y-o-y

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.

Regulation To Slow House Price Inflation

The UAE central bank has few tools to tame house price inflation as the UAE dirham's peg reduces the ability to hike interest rates away from the ultra-low levels in the US. In addition, given the UAE's status as a low tax environment, the country is unlikely to implement strategies seen in other regions that are experiencing rapid house price gains, such as Hong Kong and Singapore's implementation in Q114 of 15% and 30% taxes on the quick resale of property. It is worth noting, however, that prime real estate in Dubai costs around USD7,000 per square metre against approximately USD30,000 in Singapore, according to Knight Frank.

We expect house price inflation to slow as the impact of new regulation takes hold. In 2013, the UAE central bank restricted the amount of money buyers could borrow via home loans, at 75% for expatriates and 80% for nationals. While the effectiveness of this measure is watered down as around a third of Dubai's property purchases are made in cash, it shows that the government is taking tentative steps to avoid another property bubble. More effectively, at the end of 2013, Dubai doubled tax on real estate transactions from 2% to 4%, the impact of which is beginning to take effect.

In addition to government legislation, self-regulation appears to be taking hold. Most recently, partly state-owned Emaar  Properties restricted the resale of property only after 40% of payment has been made. This will reduce 'flipping', whereby off-plan properties are bought then quickly resold to make a rapid gain, which was a significant factor behind the crash in 2009.

Tentative Signs Of A Slowdown In Q114
Dubai - Value Of New Housing

While Dubai is unlikely to copy measures in Hong Kong and Singapore, regulation elsewhere will slow real estate price rises. The new Narenda Modi government in India removed an exemption on capital gains tax for those buying property overseas. Previously, Indians who sold property and bought another residence within two years, or within three years for newly built homes, were exempt from a 20% capital gains tax. This will have a significant impact on Dubai's housing market as almost a quarter of the USD9.8bn invested in the emirate's property market in 2013 was by Indian nationals, the most important foreign investors in the sector.

Fundamental Demand Supporting Price Gains

Improvements in the real estate market have also been driven by an increasing population and growing economy, rather than speculation, which was the main driver in the lead-up to the 2008 housing crisis. Dubai has benefited from instability in the rest of the Arab world with investors from Bahrain, Lebanon and, to a lesser extent, Egypt putting money into the emirate's real estate. With political instability in the rest of the region to remain elevated for the coming years, we do not expect these financial inflows to reverse any time soon.

An improving macroeconomic backdrop will also provide support to the real estate market. We forecast that Dubai will outperform the other emirates and become an increasingly important growth driver in the UAE on the back of the tourism, construction and retail sectors. In addition, the key risk of the 2014 debt funding cliff is lessening as restructuring is occurring relatively smoothly. We forecast real GDP growth of 4.3% in 2014 and 4.5% in 2015, following an estimated 4.1% in 2013. Rising demand is increasingly being matched by supply with approximately 15,000 new apartments due to come online in 2015, the second highest annual figure for almost a decade.

Two further factors should prevent a repeat of the 2009 real estate crisis. First, compared with 2009, data transparency is far better now. Thus the recognition lag of an exorbitant run-up in prices will be shorter than was the case five years ago. Furthermore, Dubai is likely to be under greater pressure from Abu Dhabi to show more restraint and put in place regulation if valuations continue their exorbitant rise.

Sustainable Footing?
Abu Dhabi & Dubai - House Price-To-Income Ratios  

Some Cause For Concern

There is one cause for concern regarding the run-up in real estate values, as the house price-to-income ratio in Dubai is almost at the same level as it was in June 2008, indicating that price rises are not being fully supported by earnings growth. While the data currently available only go up to December 2013, and we expect a slowdown since then, if this ratio heads noticeably higher, concern about a bubble forming could prove justified.

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This article is tagged to:
Sector: Country Risk, Infrastructure, Real Estate
Geography: United Arab Emirates
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