The overbuilding of Miami condominium buildings is worrying realtors. They point to 10,000 completions this year and 10,000 next year, while only 11,000 units were absorbed by the market in the previous decade. Importantly the developers are highly leveraged and so are the off plan buyers of many of these units.
At a superficial level there is a comparison with Dubai. One private building materials group has its own estimate that suggests 50,000 units will be completed this year and 50,000 next year, with around half of these units bought by wealthy people as second homes, usually without finance.
The annual take-up of apartments in Dubai is a matter for some debate among analysts. But estimates range from 10-30,000 apartments. Thus the most optimistic analysts see this bulge in completions being very quickly absorbed, and the more pessimistic see a couple of years of oversupply.
Pessimists are more concerned about the leveraging of off plan units, although the figures from Dubai mortgage providers suggest that no more than 15,000 off plan apartments have been bought using finance, and that means that 85 per cent are bought with cash.
In theory if apartments fell sharply in value then those borrowers who had not actually paid down much more than the deposit, which can be as low as four per cent, could be tempted to hand the keys back to their lender and default.
But the potential for such bad loans is clearly on a far smaller scale than in the US where borrowing is almost universal for real estate while in Dubai such leverage is in its infancy and at low levels. Repossessions could therefore depress the Dubai market for a short while but would not leave it seriously undermined.
Indeed, the amount of equity investment in Dubai real estate is one reason to believe it will ride-out the predicted correction period next year in much better shape than the more advanced markets like Miami. For Miami has less apartments under construction but considerably more real estate leverage wrapped up in this process.
In the 1999 real estate downturn in Dubai, which followed a local stock market crash and the Asian Financial Crisis, many observers were amazed at the resilience of the sector which at the time again looked to be overbuilding.
What happened was that property owners were not greatly leveraged and just sat out the downturn, even leaving buildings empty rather than cut their rentals.
It could be different this time. But as in 1999 the biggest player in the Dubai market is the Dubai Government, so expect a case of deja vu all over again.
Also it should be noted that the capacity of a dynamic emerging economy like Dubai to absorb spare residential capacity is a lot stronger than a mature economy like Florida which may have similar levels of sunshine and tourism but that is where the comparison ends.
Sure a few fringe developers may decide to axe over ambitious projects, and some might collapse. And that will be the correction, not a massive collapse of real estate prices or a major crisis. Without the leverage it just will not happen, and bargain hunters might have to wait for another future crisis when real estate borrowing forces prices too high to be sustainable.