Drop in Dubai house prices causes inflation to fall dramatically (page 1 of 2)

In the first half of 2008, at the height of an unprecedented construction- and real estate-led economic boom, inflation in the UAE reached a record 13%. According to US investment bank Merrill Lynch, inflation had become a "major problem" for the Gulf state - a conclusion no doubt echoed by the millions of UAE residents facing soaring housing costs and suffering from the dirham's peg to a weak dollar, as well as negative real interest rates.

Merrill estimated the UAE's GDP growth would hit around 7.2% for the full year, underpinned by an oil price which averaged around $115 a barrel in the first half of the year, and had hit a record high of $147.27 in July. What's more, 2008 was by no means an unusual year - GDP growth in the UAE had averaged close to 10% over the previous five years.

Remaining UAE residents paying less to live in city

Fast-forward to early 2011 and those who are still left in the UAE in the wake of the credit crisis and Dubai's tumble from grace, are at least paying less for the privilege. According to government figures, inflation in the UAE eased to 0.9% in 2010, its lowest annual level since the first Gulf War rocked the region in 1990, and down from 1.6% in 2009, the height of the financial crisis. Meanwhile, consumer price growth - which measures changes in the price level of consumer goods and services purchased by households - rested close to 1% over the year, down 0.6% from 2009.

The real estate sector slump has seen rents drop sharply and excess supply all but flatten property sales. According to the UAE Central Bank, banks in the country provisioned more than $11.2bn for non-performing loans by end-November 2010, severely denting their lending appetites in the process. And the debt woes of Dubai state-owned firms have added to the uncertain climate: Dubai World has struck a $25bn debt restructuring deal with creditors, but a heavy debt repayment schedule means the state has significant obligations falling in 2011, when cash flows are expected to remain weak.

"Rents represent almost half of the CPI in the UAE," says Philippe Dauba-Pantanacce, senior economist for the MENA region at Standard Chartered. "As a result, the collapse in the real estate prices in the UAE has mechanically put a substantial downward pressure on the headline inflation figure."

Dubai real estate sector hit hard by credit crunch

The real estate slump has hit Dubai particularly hard. Once famed for reshaping its coastline to build ambitious mega-projects such as the Palm islands and World archipelagos, the emirate is now littered with oversupply. According to property consultant Jones Lang LaSalle, around 36,000 new units came onto the Dubai market in 2010, while 25,000 new units are scheduled to come onto the market in 2011.

Inflation in the emirate slowed to 0.6% in 2010, from 4% in 2009, according to figures from the Dubai Statistics Center. Ongoing weakness in the property sector has accounted for much of this drop: despite significant increases in water and electricity costs in 2010, housing and utilities costs slumped 1.3% in the year, after a 2.4% rise the previous year.

"Housing is obviously a significant component of living costs, but Dubai has seen a significant adjustment in pricing, and that's been of great benefit to tenants," says Craig Plumb, Jones Lang LaSalle's Head of Research for the MENA region.