Dubai and other countries found in the gulf region are among the countries that were affected by the global financial crises that took place in the year 2008(Zaki, 2012). According to Zaki, Dubai is one of the countries that have managed to eliminate the negative effects of the word recession. This can be confirmed from the fact that recovery in the real estate investment has been witnessed. Many people have started investing in real estate’s as before. The demand for houses in Dubai has increased and this is what has facilitated the motivation to engage in investment in real estates. The demand for other goods and services in the economy has also gone up. Employment opportunities in Dubai have also been created with the new current trend. This research paper will evaluate the effects of economic recession that occurred in the year 2008 affected Dubai (LOUNSBURY, 2010).
The current economic situation in Dubai
The UAE is considered one of the most competitive economies in the world today according to financial analysts. There are challenges that the country has to overcome in order to maintain its competitive position in the global market. The economy is faced by issues such as oversupply within the real estate industry, bond repayments, an ongoing debt(Zembowicz, 2009). Despite the challenges, the state has made significant recovery steps from the effect of the global financial crisis in 2008. According to Foder( 2010), the economy is currently growing at a rate of 4.5 percent and this is an increase compared to that of last year, which was 3 percent. The main sector contributing to the growth of the economy is tourism. The economy used to rely heavily on oil but now oil only account for 3 percent of its gross domestic product. Despite such figures showing recovery from the crunch, real estate has not yet reached the previous rate of growth since investors fear the effects of occurrence of another financial depression. However, people have gained confidence with time and some signs of investment in the sector have been witnessed. Banks have reported a slight increase in demand for mortgages according to Foder (2010).
The motivation to invest in the real estates in Dubai remains low. Many investors remember the effects that the financial crisis had to them. However, measures are being taken to improve the confidence of these investors. Laws are being made to ensure that the investors feel secure. They are allowed to decide the firms that are to manage their real estate management. (INTERNATIONAL MONETARY FUND, 2009).
Many financial advisors are now present in Dubai to offer advice to real estate investors. They are important in telling the risks associated with the invested and when they should invest. Additionally, real estate investors have realized the importance of choosing the design of houses preferred most by people. This has made real estate plans very expensive (KHAMIS, 2011).
The economic situation during the global financial crisis
The effect of the financial crisis started to be felt in Dubai and the greater Gulf region in early 2009. This region was insulated from the effects of recession due to the fact that investors in the region were not very much aware of various financial services that would have helped them access money easily. Therefore, these investors had no problems in the repayment of loans they had borrowed. However, financial crises led to los of value of real estate’s leading to losses. The effects of the crisis were felt in the early 2009 (Zaki et al, 2012). The biggest blow was when foreign investors withdrew from the region’s markets. This affected several other industries including the real estate industry. Since Dubai has the second largest capital market in the region, the impact felt on Dubai’s real estate market was relatively huge. The losses made on its market capitalization according to Zaki et al. (2012), stood at 32%. This was however lower than that made by Saudi Arabia but higher than states such as Qatar, Abu Dhabi, and Kuwait. The losses necessitated interventions strategies to avoid further decline. Regulators in Dubai resorted to measures such as bond program and re-capitalization aimed at affected banks.
Impact on the real estate market
According to analysts, the real estate market was mainly impacted through creation of a dramatic shift in home buying. The prices of homes reduced significantly because of the fear of vacancies. According to Renaud (2012), the prices of real estates fell due to the increase supply of the products in the real market. The banks were also no longer willing to lend money to people to pruchase the estates. The inestors made a decision not to sell the real estates until the prices of these products increase. This was because selling these estates at the price was prevailing would lead to losses and therefore the investors would not be able to repay their loans.
Before, the crisis, properties in the region had shot up so highly in terms of prices and generally, buying decisions were shifted away. However, during the crisis, there was mixed reactions among investors. The financial crisis implied that if they maintained the high prices, then prospects of ever influencing buyer decision to shift towards buying would be low. Therefore, the global financial crisis created a trend of reducing property prices.
Despite the reduction, there was still mixed reactions among buyers. According to analysis of the situation, there were three main perceptions or views by financial analysts that contributed to confusion among buyers. The first perception is mainly based on the psychology of the buyers. The second was the supply and demand situation while the third view focused on the overall economic situation (Ibrahim, 2012). It was expected that the situation will continue to be on the decline as prices of houses and properties continue to fall. It was also projected that it would take until mid 2011 for the state’s economy to make a rebound. Therefore, the downward trend witnessed in the real estate market was expected to continue until this period.
Balasubramanian (2010) says that before the country was hit by the effect of the global financial crisis, there was a perpetual and irrationally exuberant rise in real estate prices. However, when the prices began to drop as a result of the impact of the global economic crisis, the country saw a situation where there was excessive supply in real estate properties but the demand was dwindling. This situation is argued by Balasubramanian, (2010) to be the main reason behind the foundational shakeup of the current economic situatution. Balasubramanian further argues that the government of Dubai is heavily making investments in the real estate sector. This move can be very costly especially if the current decline in the real estate market persist. He notes that there is need to focus on other sectors of the economy in order to further stabilize the economy. It would not be prudent if the government fails to balance its investments across all sectors that support the economy (HASSAN, 2011).
The harsh impact of the global financial crisis in Dubai’s real estate market has also been asserted by (Ibrahim, et al., 2012). According to this article, the Gulf region which include Dubai and other states, has witnessed a sharp increase in prices of real estate for a decade now. However, the decelleration currently seen was mainly due to the impact of the global financial crisis in 2008. Ibrahim et al. (2012) notes that there have been several factors that contributed to the increase prior the economic crunch. Factors such oil boom availed huge investmet funds to the people in the region. with these funds, people directed the investments to real estate markets. The attractive financial environment made people to borrow money and invest in real estate market. The economic environment was attratctie in that the loans were availed at low interest rates. The prices of real estates were high such that investors were motivated to invest. However, these factors no longer come into play as the economy is strungling to pick up after the huge blow. Nonetheless, Ibrahim et al. (2012) also notes that these factors are still likely to help the real estate industry back on its feet.
It can however, be seen that even though the real estate market is gradually making a rebound, there is still significant losses made now primarily because of the current economic situation and challenges. Demand for real estate property has continued to increase thereby creating a balance between supply and demand. Since 2010, residential housing units in Dubai have become affordable because of the economic rebound. These two factors have been noted within the report to be the major contributors to the recent marginal recovery.
According to the article by the slow recovery can be attributed to the cautious attitude of investors in approaching the situation. Based on the huge impact and downward trend of the real estate market in the country, investors are likely to avoid any further move or make an approach out of cautiousness. The article also identifies an increase in residential house purchase or rentals. This has been attributed to an increase in economic growth in the state. During the crisis, where the entire real estate market declined by up to 32 percent, many investors decided to flee the state in fear of further declining of the economy. However, the government was persistent in putting measures that continued to attract investors (GUP, 2011).
The financial crisis necessitated government intervention to help heal the sector. The government had to provide funds to financial institutions that were to be loaned to people who wished to invest in real estate. The aim of these actions was to deal with the decreasing supply of real estate in Dubai. This is because the supply after the crisis was falling below demand.
Zembowicz (2009) concurs with the assertions made by and , that Dubai has been a regional hub for the real estate market. The state has witnessed rapid expansion within the real estate sector estpecially with regards to housing and hotels. Despite all the flare and lavish extravagance, as noted by Zembowicz (2009), he says that the country does not operate like an isolated island. The country is very much connected to the rest of the world. This makes it vulnerable to any crisis that would occur across the world. Zembowicz (2009) says that there was no way the country could be insulated from the impact of the global financial crisis which began in the US. The global economic crisis therefore put a cooling pressure on the country’s booming real estate market.
Zembowicz (2009) says that the real estate market in Dubai relies on international consumers. This assertion is supports what Zaki, et al. (2012) says that residential housing are beginning to make a gain in the country’s real estate market. Since the country’ attracts a lot of foreign investors, residential properties are generally occupied by these investors. However, during the economic crunch, says that a lot of foreign investors fled the country in fear of an aggrevated situation. At the same time, the economic crisis meant that cash flow intot he country is decreasing. As noted by Zembowicz (2009), so many projects that relied on contructions and real estate were put on hold and there was a mass exodus of laborers.
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