Global property warnings also apply to Dubai!

'The consensus view is almost unanimous that property prices are set to fall. Transaction volumes are drying up, higher interest rates and prices have damaged affordability, developers are suffering a regulatory and capital markets squeeze, supply is impending,' wrote Citigroup about the market in India.

However, the same global economic forces that are impacting property markets in countries as diverse as the US, Spain and India are present in Dubai where most of the remarks made about India by Citigroup could also be applied.

Dubai real estate agents report lower transaction volumes this year, with higher prices and higher mortgage costs impacting local affordability. Developers have also been finding it more difficult to raise capital, although the success of the Deyaar initial public offering might encourage others into the local equity market.

Oversupply

And the impending oversupply of the Dubai real estate market is generally acknowledged by market experts like EFG Hermes and Standard Chartered Bank. It is only a series of construction delays that is holding back supply from the market, and this is not likely to be an indefinite phenomenon.

Indeed, there has been a worldwide boom in property prices driven by the slashing of interest rates in the early 2000s to counter the impact of the US dot-com crash. But interest rates have now swung back to more normal long term average levels, and the very high levels of property prices are no longer supported by low borrowing costs.

Typically higher interest rates slow and then reverse a property boom, and this cycle of expansion on the back of easy credit and then a correction after credit becomes tighter is one of the most easily understood capital cycles in the global economy.

Higher interest rates

However, the reaction of the market to higher interest rates does carry a time lag as it takes a period for investor enthusiasm to calm down and for them to appreciate the change in circumstances.

All the same, the Dubai property market is only five years old and judging what will happen in a downturn in such a new market is particularly difficult as there is no local precedent to follow.

Indeed, it would be fair to conclude that the Dubai property price boom first reflected a degree of catching up with rival foreign markets, and that only the second phase is perhaps out of kilter with changing global economic circumstances, i.e. higher interest rates.

For a large Dubai villa can still cost less than a one-bedroom apartment in London, despite the high tax-free salaries for some expatriates in the emirate these days, and the arbitrage between these anomalies may not yet be done.