Dubai Economic Issue
The real estate sector in Dubai is a major contributor of the gross domestic product in the United Arab Emirates. However, this sector was widely affected by the global financial crisis in 2008/2009. In this period, the real estate market experienced a sharp decline in the price of the property in the mid-2008 and 2009. As a result of the drop in prices of real estate, the Abu Dhabi market was also affected. This decline continued in the residential property until the end of 2011 though the effect lasted longer in the larger Abu Dhabi until 2012.
However, the real estate market sector has experienced a strong recovery since then experiencing announcements of mega projects and investments in the run up to the world expo 2020. This has led to positive general property outlook for the year 2014 where prices are expected to retain their upward increment. And as a result of winning the bid to hold the world expo at 2020, Dubai is expected to host 20 million tourists annually and in addition create slightly over 250,000 jobs. The price growth is expected to rise by between 10-15%, meaning that it will be ahead of Asian markets such as Shanghai and Beijing that are expected to grow at 5-10% (www.gateleyae.com).
The rising price income has been used to value the real estate market in Dubai. The price increase has made Dubai more resistant and hence withstood external shocks as compared to the real estate collapse of 2008 that was influenced by the global financial crisis. The construction sector share in Dubai’s economy has decreased today as compared to 2008. In 2008, the share was 14% while in 2013 the share was 8% (Irwin, & Shukurov, 2014). This reduction in the share of the economic growth is explained by the lower share of construction in the economy, hence the decline in the overall effect.
However, though the sector is benefitting economic growth, it has also raised concerns of the probability of a real estate bubble. This is because, though the economy is experiencing improved, market fundamentals and enhanced performance, there is large speculative demand in the residential sector of the real estate. Increase in the prices may have invited some flipping activity, though the scale is not much big as that of 2008. Most of the projects are being run by stable large-scale developers, compared to 2008 where the smaller scale developers were involved, hence taking care to contain the supply with the expected demand (Irwin, & Shukurov, 2014). The risk arises though, where the demand may become inflated due to speculation and hence developers act on the demand through increased supply. Such increase of oversupply and over demand would consequently lead to a disruptive correction.
As such, measures have been put fixed to help tackle this risk of oversupply and over demand, and ensure reduced speculative demand. Such measures have been used to alter the registration requirements, for instance, increasing the registration fees from 2-4% in order to stop flipping. In addition, it is mandatory for developers to have a full ownership of their land and ensure they hold a fifth of the construction cost in a special escrow account (Irwin, & Shukurov, 2014). Moreover, some developers have gone a step further to self-introduce projects restrictions such as restricting resale of unfinished properties until 40% of the property’s value is paid.
Furthermore, the central bank of the United Arab Emirates (CBU) has come up with regulations aimed at regulating the macro environment, ensure resistance of the banking sector to shocks and contain credit financed speculative demand. It has done this by putting restrictions on the ability of the banks to lend emirate governments. It has also limited the borrowers’ debt service to income ratios to 50% in addition to restricting loan to value ratios for mortgages (www.gateleyae.com). Moreover, all the real estate transactions must be registered with the Dubai land department hence limiting the power of the attorney for conducting a real estate transaction.
Though these measures have been taken to deal with the issue of speculative demand and hence ensure resilience in case of a financial crisis, more measures need to be taken. Such measures call for a policy mix since not a single measure can be said to solve the risks fully. As such, restrictions on the loan-to-value ratios can aid in reducing the pressure on the real estate prices. By restraining credit financed speculation, CBU decreases the extent of banking sector exposure and consequently shielding it from a probable large correction (Irwin, & Shukurov, 2014). And though these measures as indicated earlier have been introduced in the United Arab Emirates, it calls for tightening in cases where the prices increases remain high and where the real estate lending picks up strongly.
In addition, the real estate transactions fees are useful for real estate markets that are widely based on cash transactions. However, large increases in the transactions fees may have adverse effects on both the speculative and real demand. As such, transaction fees could be raised for properties that are resold within a short time of purchase and leaving all the other transactions un-altered.
References
Irwin, T., & Shukurov, B. (2014). United Arab Emirates selected issues.. Washington, D.C.: International Monetary Fund.www.gateleyae.com
Deutsche Bank, 2013. Markets Research: UAE Real Estate. 28 November, 2013.
AlSadik, A. T. (2012). The global economic crisis and consequences for development strategy in Dubai. New York: Palgrave Macmillan.
