'We expect oversupply to hit Dubai in 2009, leading to a period of price declines,' says the report.
'For our base case, we forecast a 10% decline .'
The report adds that though the oversupply will hit the market in 2009, it will take until 2010 for the financial effects to be felt.
'In Dubai, the Land Department has recorded a fourfold increase in land prices since 2000. Although this is driven in part by genuine demand, speculative investment has also contributed to the price rises, in our view,' the report continues.
Property prices in the city have registered an average increase of approximately 76% in the past 18 months according to industry figures. In the first six months of 2008 alone, prices shot up by a further 25%.
This average evens out across the various developments: The Burj Dubai and the surrounding Business Bay district have seen the asking price for property go up just over 100% in the past year.
Other developments, including the International Media Production Zone, have hovered at the 35% to 38% mark during the same period. Which low point still marks a staggering increase compared to more mature international markets.
Speculators fuel house prices
These rapid increases have attracted speculators to the market, drawn by the staggering gains made by early investors. Most properties have at least doubled in value in the past three years, driven by the critical shortage of units that has seen workers move our into the neighbouring emirates of Sharjah and Ajman.
The Morgan Stanley report notes that any shift in the upward trend could have repercussions beyond Dubai:
'While we expect these price declines to be limited to Dubai - given the level of undersupply in surrounding markets…A hard landing in real estate prices in any of the GCC real estate markets, especially Dubai, would damage investor sentiment throughout the region (primarily among high-yield driven investors), and would leave demand dependent on real long-term housing needs.'
Some of the emirate's biggest developers have already begun implementing controls to dampen the influence of speculators on project prices.
Nakheel announced last week that investors in the Trump International Hotel and Tower would be barred from selling on their property for a year after purchase. Other developers are likely to implement similar schemes in the near future.
Housing units to almost double
The report bases its predictions on figures for the number of residents in the city compared to the number of available housing units. Population estimates for 2007 stand at 1.4 million, split between 245,000 units.
The total number of units for 2010 is estimated to be 429,000, with the majority of new properties coming online in the Dubai Marina and Jumeirah Lake towers developments. The 2012 population is estimated to reach two million residents.
Although some leeway is given for construction delays, which would prolong current market conditions, the figures would result in supply exceeding demand – leaving prices open to a correction.
The report points to 2009 as the year to watch, with 'excess planned supply and current negative sentiment. Both may cause a higher than expected negative impact.'
The supply/demand gap will then continue to widen in 2010.
Despite the report's predictions, the long-term outlook remains positive. Once a correction has taken place, the continued influx of residents in to Dubai should ensure that the market remains relatively stable.
The value may fall by 10%, but investors should still come out on top, as values can expect to have shot up by a minimum of 15% per year, based on trends from the past five years, before then.See also:Abu Dhabi property prices to increase until 2012Dubai average price index