Why Dubai's housing market is more riskier than we thought

Published March 9th, 2014 - 07:16 GMT
Dubai property prices now stand among the highest in the world (File Archive)
Dubai property prices now stand among the highest in the world (File Archive)

Dubai’s rising house prices are among the largest risks to the emirate’s economy this year, an expert has said.

“One of the risk that Dubai ran back in 2008 to 2009 when its economy got really inflated was that housing prices were rising massively,” said Shady Shaher, senior economist at Standard Chartered, MENA.

“Do not underestimate the risk the housing market can pose for the economy. Housing basket is 40 per cent of total inflation basket and the largest component.

“I think it is only going to accelerate significantly in 2014. So managing growth will be the key element post crisis in Dubai and the UAE,” he said.

Real estate was one of the worst affected sectors during Dubai’s economic crash in 2009. But as the emirate’s economy has recovered so too have property prices rising around 30 per cent in 2013.

Dubai’s real estate authorities have taken various steps to stem increasing house prices. Last year, Dubai’s land department increased the property transaction fee from two to four per cent while a ruling that restricted mortgages for the purchase of property has also come into force.

However, an influx of buyers with ready cash has refuelled fears of a property bubble akin to 2008.

“In my view they (authorities) have not gone far enough. They need to cap these prices, they need to retain Dubai’s attractiveness as the regional hub otherwise there is competition for talent coming up in the region and that competition can be on a price competitive standpoint, so Dubai needs to be aware of the risks,” said Shaher.

“I have to point out that with inflation – at this point there are limited tools and it is up to the property market regulators and property market developers to control inflation of the housing market.”

Dubai’s inflation rate rose by 2.17 per cent year-on-year in January, data from Dubai Statistics Centre (DSC) revealed.

This rise was mainly driven by the increased cost of education, which grew by 3.99 per cent last month, while housing, water, electricity, gas and other fuel costs also rose 3.87 per cent.

Economists have forecast that the UAE’s inflation rate will be above four per cent this year, the highest since the record 12.3 per cent in 2008 prior to the crash.

But a surge of inflation could prove tricky for the UAE to contain because its dirham currency is pegged to the US dollar, making it hard for the central bank to tighten policy while US interest rates remain very low, according to Reuters.

Average inflation in the UAE accelerated at the highest rate since 2009, rising from 0.7 per cent in 2012 to 1.1 per cent in 2013.

By Mary Sophia

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