The Dubai property market has benefited from the same global market forces that have accelerated investment in real estate around the world since the new millennium.
After the dot-com bust in 2000 the US adopted a policy of ultra-low interest rates to ensure that the colossal Nasdaq stock market bust did not break the US economy. Lower global interest rates made property more affordable and so gradually the pricing of real estate began to move higher and higher.
The problem is that this boom rapidly turned into a bubble, with high real estate valuations underpinned by low interest rates. One sign that things have been getting out of hand is the collapse in rental yields that landlords will accept; the yield on US residential property has slumped to 2.5%.
Now the US has reversed its interest rate policy in the past 18 months, and yet the price of property has remained inflated. However, the US real estate market has cooled off in 2006 with definite signs of stress such as high inventories of new property and falling prices.
Rising interest rates
It is true that mortgage rates never went as low as the Federal Reserve's discount rate, but 30-year mortgage rates are now rising, and the many buyers who have recently opted for adjustable mortgage rates are feeling the squeeze.
This is a sea change for the global real estate market which enjoyed a five year boom after the dot-com crash. The Economist reckons property in many markets is 50 per cent overvalued on many valuation yardsticks. What remains to be seen is whether real estate prices will now stagnate for a period to achieve an adjustment to rising incomes, or whether a more dramatic price correction or slump will ensue.
Foreign buyers only
Dubai has clearly been a beneficiary from the global boom in real estate, and has come forward with attractively priced new luxury property for off-plan sales. Indeed, for many recent upscale projects the buyers have been almost entirely from overseas.
This surely makes Dubai more vulnerable to global trends than in the past, and if the worldwide downtrend in real estate prices gathers pace then Dubai can not expect to escape unscathed. If real estate investors take a hit at home then they are less likely to want to buy overseas.
On the other hand, developments in Dubai continue to offer excellent value-for-money in comparison to many global cities. But again if foreign real estate markets take a tumble then they will become more competitive with Dubai.
In short, if the global flow of capital into real estate continues to falter then this is bound to impact on Dubai property, but for the moment these buyers are still very much in evidence and one of the major factors supporting the current boom.