Inflation sparking price rises as property oversupply fails to materialise

It was not very long ago that Dubai property watchers believed that this autumn would be the moment that the market tipped into oversupply, with the prospect of declining prices and rents in 2008.

But today it would be hard to find a single analyst supporting that view. The new consensus is that construction delays and the continuing economic boom in Dubai mean that it will be 2010 at least before the proverbial shoe drops, and even then the slowdown will be gradual rather than a bursting of a bubble.

Why is it that the harbingers of doom have been so convincingly trounced by the outcome this autumn?

Overoptimistic developers

The short answer is that analysts overestimated the speed at which construction projects could be completed in Dubai. This is not their fault, most of the developers were hopelessly optimistic with their timetables.

According to the original schedule, The Palm Jumeirah should have been completely finished by the end of this year, and yet the contract for the landmark Trump hotel complex has only just been awarded and the hotel sites on the crescent remain vacant.

Analysts also underestimated the strength and longevity of the Dubai economic boom. Again this can be forgiven, who would have forecast oil at $96-a-barrel even two years ago?

Inflationary expectations were also widely underestimated in Dubai. Building costs have soared and promised projects have not yet materialised on site, and perhaps they never will if the developers think they no longer make economic sense.

Higher prices

What is on the agenda instead for the immediate future - unless the US goes into recession and pulls oil prices sharply down - is a period of further supply and demand pressures on the local housing stock in Dubai. That will mean higher rents and selling prices.

This will be compounded by the impact of falling local mortgage rates thanks to lower US interest rates. There will be more money available to pursue the limited housing stock and prices will be driven even higher.

At some point these pressures will ease. Perhaps the world economy will slow and consume less oil and that cools the Dubai economy with a lag of around six months. And eventually the mega projects will deliver a supply of property nearer to the level of demand.

However, the fact of the matter is that earlier forecasts have proven completely misleading, and underline the difficulty of relying on information provided by optimistic developers.

At least now observers are taking a more detached and skeptical view of the information on offer, and that might mean that the conclusions drawn are that bit more accurate. But we will probably have to wait until 2010 before that can be really known.

See also:
Property buyers face lengthy but profitable wait
Why revaluation should be top of the UAE agenda to beat inflation
Buyers want more in Gulf property boom