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Inflationary pressures also rising
Meanwhile, we expect inflationary pressures to accelerate in the near-term, with rising rents a major contributing factor to this acceleration. After 4.6% inflation last year, we expect inflation to accelerate to 6.5% in 2005.
The recent 31.5% increase in petrol prices reinforces this upward bias for inflationary pressures going forward with taxi drivers already indicating they should be allowed to pass on this cost increase to passengers.
For 2006, we expect inflation to slow back to 5%, although this is premised on the assumption that rent price accretion will slow somewhat next year as new projects are completed and the supply of properties at least matches the increase in demand.
However, one aspect that has supported property prices this year has been the delays in the completion of projects and the risk is that this continues into 2006.
Key challenge is to retain cost competitiveness
Looking over a longer time period, the key challenge for the UAE is to translate these strong fiscal surpluses into a sustained strong economic performance, even in the event that oil prices slump.
In this regard, the need to retain cost competitiveness is a key issue. But for this to be addressed, the current housing boom must come to an end in the not-too-distant future. Hopefully, the new supply of housing will deflate the property and equity market bubbles, rather than bursting them.
Steve Brice, Regional Head of Research, Standard Chartered Bank
