Should the global property boom worry buyers in Dubai?
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Should the global property boom worry buyers in Dubai?

Should the global property boom worry buyers in Dubai?

The simultaneous inflation of property markets around the world to seemingly unsustainable levels is troubling economists. Is this a problem that should concern buyers in Dubai where prices are still well below international levels?

    The lead article in The Economist magazine this week discusses the worldwide explosion of property prices over the past few years, and the impact that the bursting of this investment bubble is likely to have on the global economy.

    And this is not just another example of an investment bubble. The Economist has done its sums and concludes that the global property market today is the biggest single example of financial speculation in the history of the world.

    Low interest rates following the dot-com crash in 2000 have driven house prices up and up in many key markets around the world. The real danger is that the globalization of financial markets has resulted in an unsustainable and simultaneous boom in property prices from San Francisco through London and parts of Europe to Hong Kong and Asia.

    The Dubai property market is also caught in this global rush for property investment, albeit as the newest entrant to the worldwide real estate market. For Dubai property only really joined the global market a little over three years ago with the opening of sales to foreigners.

    Since then demand for property has exploded in Dubai and dozens of major real estate projects are underway. Foreign money, particularly from Kuwait and Saudi Arabia, is pouring into Dubai real estate.

    But relatively little new accommodation has been completed – Emaar Properties has only delivered around 10,000 units so far – and actual finished property is now in short supply, a prime factor behind 40% plus rental increases in 2005.

    Now if the global property bubble was to burst, as The Economist suggests, that this would probably trigger a worldwide recession. For the GCC countries this would likely result in a lower oil price – though the dynamics of the oil market these days are somewhat removed from global economics – and this would reduce liquidity and hence investment in property.

    However, Dubai property has several factors that set it apart from the global real estate market. First, prices per square metre of accommodation are still very low by world standards; and in a global competition for funds the money will still tend to flow to the lowest cost producer.

    Second, the UAE is undergoing major economic reforms of which the liberalization of property ownership is just one aspect, and a new property law expected in September should further encourage buyers. The new companies' law that may allow up to 100% foreign ownership is an equally important step which will align the local economy far more with the global economy.

    Thirdly, the rapid development of the local mortgage market augurs well for the availability of finance for property investment, and sky-high rentals are encouraging people to buy rather than rent.

    It is actually perfectly feasible for the world economy to go through a major recession – like in the 1970s with oil prices staying high - and for the UAE to transform its economy.

    Under these circumstances it would be reasonable to expect local real estate prices to advance closer to global levels, and to actually pass falling global property prices at some stage.

    This is not to say that those who argue that the supply of property will one day exceed demand in the UAE are completely wrong. But it could take a lot longer than they think, and in the meantime property prices are likely to get closer to international levels. Certainly to expect Dubai property prices to fall while rents are surging ahead is ridiculous.
    Author
    AMEinfo Staff

    AMEinfo staff members report business news and views from across the Middle East and North Africa region, and analyse global events impacting the region today.

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