Dubai house price inflation

Some of my friends who spoke scathingly a year ago about the idea of buying property in Dubai have decided to take the plunge. Their only problem is now that developers have run out of stock, as one put it there is 'an inventory problem'.

And we are not talking about houses ready for occupancy. Developers have run out of property to sell in developments that have not been built yet. In short the architects can not draw up new plans fast enough.

Thus buyers this summer are forced to participate in the increasingly lively re-sale market, grappling with a new breed of Dubai estate agent and very much in danger of being 'gazumped'.

This is a British term for finding that somebody else comes along and offers a higher price after you thought the sale was closed. Actually in Dubai a common trick is to pretend another buyer has offered a higher price to test the wealth, greed and stupidity of the buyer.

But prices definitely are on the way up. As a rule of thumb agents will tell you Dubai real estate prices have been moving up at about 10% per annum for the past three years. This is just an overall picture, and there are no official figures to support it, and clearly price rises vary from location to location.

Fall in love with The Palm, Jumeirah and the price of love may prove very high indeed. More down-to-earth options like The Springs, an Emaar complex of 4,000 town houses behind Emirates Hills, are commanding 10-15%, or less if the seller is a speculator keen to get out before having to cough up the full amount.

However, the interesting point to note is that supply and demand are no longer in equilibrium, and far from Dubai being saturated with real estate there is not enough to go around. In the heat of the summer perhaps the forces of supply and demand are being held back by the climate and the imminence of holidays, but imagine what may happen this autumn.

Certainly developers are working overtime with their architects to dream up new projects, but with all the work-in-progress there is a limit as to what they can handle at any one time. So this autumn we could start to see some serious real estate price inflation in Dubai.

One factor that will drive house and apartment prices upwards is the rising cost of building materials, in particular steel and cement, the basic materials used in this part of the world.

Developers will have no choice but to pass this inflation on to house buyers and this will tend to push up the price of housing in general; otherwise developers would just stop building because they could not afford to do it.

Eventually house prices will rise to a point at which people can no longer afford them, or when speculators can not afford to meet their final payments. But that day could be some years away.

The experience of other real estate markets is that booms persist for a number of years, usually followed by a sharp correction and flat prices for some years. The pattern may vary a bit in Dubai, as a very new market, but there is little reason to expect it to be very much different.