Oil prices, liquidity and Dubai real estate

It is a truth often observed that the oil price is the main driver of business and economics in the Middle East, with even the non-oil producers benefiting when the oil producers are in the money.

This is a matter of simple mathematics. If the oil price falls by 30 per cent, as it has since last July, then nominal GDP takes a hit. But after five years of rising oil prices there is a big cushion of savings against falling prices and governments are not about to slash their spending plans immediately.

What is at risk is the further growth of economies that have become accustomed to high levels of growth in recent years. New projects inevitably slow to a trickle in a climate of declining liquidity, and demand for real estate begins to ease.

Oil price blip?

However, oil price trends are notoriously fickle and most experts agree that any price weakness is just a correction within a long term bull trend. Oil supplies remain tight and new discoveries extremely rare while demand from the booming Chinese and Indian economies is surging ahead.

So in the context of Dubai property it might be fair to argue that any weakness in oil prices will tend to exaggerate the impact of the supply and demand imbalance already predicted for 2008. But oil prices are also a factor that is likely to underpin the long term economic welfare of Dubai as the trading and financial hub of the Middle East.

This status means that any drop in property prices caused by oversupply or oil price weakness should be seen as an opportunity to buy real estate in Dubai at what in the future will appear to be low prices.

Market forces?

But as we have seen with the seven per cent rental cap for 2007, the Dubai Government remains a powerful force within the local real estate market. And as Standard Chartered Bank has noted the ability of the government to respond to changing circumstances should not be underestimated.

It could, for example, choose to sit on empty housing stock rather than sell or rent it at depressed prices. Indeed this was a phenomenon of the last Dubai real estate downturn in 1999 when local landlords acted in concert to ensure little adjustment to rents.

This would be a disappointment to those hoping tenants hoping for a big fall in rentals and to those people who have waited on the sidelines to buy a bargain property. But ironing out the swings of the oil price with judicious government intervention would be appreciated by investors and rewarded in due course.