Dubai: Back to Its Lofty Heights?


In 2007, the Dubai property market was booming like no other. At auctions in the city, houses were sold within seconds of the launch, and the same flat sold again at a 10-15% profit a few minutes later. The hype was like nothing before. A huge influx of foreign direct investment and the government’s use of considerable natural reserves to cater to numerous tourists and businesses meant that Dubai was booming, and the property market shot up with it.

A housing bubble was created and after the financial crash in 2008, the Dubai property market fell spectacularly. For example, apartment prices dropped from almost £900 per sq. foot on average to £500 in downtown Bur Dubai, and to £300 in the affluent marina. According to one global investment house, prices on the Palm Jumeriah dropped by 60%, and transactions dropped from 500 per month to just 20. Speculation, along with the foreign and government investment, had undoubtedly pushed prices up to an unjustified high. However, with the global fall in confidence after the crash, and a notoriously loose monetary policy in Dubai, property prices plummeted.  Jobs were scarce, little investment occurred, and natural resources were depleted, having been consumed to fund the rapid development in the period leading up to the crash. For example, even though Dubai has dwindling oil resources, 2008/9 was the first year total UAE production actually fell. Global Property guide reported that projects totaling $582 billion were put on hold with many houses and flats left unoccupied. One of the defining images of the crash was cars covered in dust, left at Dubai airport as people fled the city with, financially, what little they had left.

Today, however, Dubai is back on its feet. House prices have risen at a good rate in the last several years. Asteco reported in Q2 of 2014 that apartment prices were up 3% and villa prices up 6%. Confidence has returned to the Middle East, and aided by considerable natural resources from Abu Dhabi (the UAE’s capital), Dubai has seen economic growth.

Abu Dhabi covers 80% of the total UAE land and borders Saudi Arabia, giving the city easy access to the oil. With plenty of state autonomy, Abu Dhabi has almost complete monopolistic control of the UAE oil resources. Abu Dhabi has been propping up Dubai and now new projects are suddenly being initiated all over the city. These include a park one third larger than London’s Hyde Park, 100 more hotels, and the world’s largest shopping centre. This increase in civil engineering investment has catapulted Dubai’s economy and property market once again to prices near the pre-crisis level. Banks are also lending again to large construction agencies like Emaar and Nakheel. Reuters reported that construction loans jumped 40.1% from last year after a 16 month lull. However, when compared to general loan increases, which were 8.8%, a worrying equation appears: while money is there to build, consumers are not taking out as many loans, which could leave excess supply. Consultants at Knight Frank said that in Q1 of 2014, house prices rose 27.7%. Dubai’s property market has posted the fastest year-on-year rise of any of the world’s major markets.

With the recent announcement that the world Expo 2020 will be held in Dubai, another stream of investment will soon be injected into the city as hotels, flats and offices are built. Pushed by the Dubai government as an aid to fast-paced growth, the city has Expo fever. Posters, banners and even phone cases lauding the Expo are everywhere.

The question remains: Is this growth all artificial and is another bubble being created? Almost directly after the Expo announcement, house prices jumped close to pre-crisis peaks showing definite signs of a bubble. The Land Department said that the price increases were due to the strong economy but it is possible there is another side to the story. Maybe a bubble is being created but officials don’t want to damage confidence. The current rate of economic growth is unstable in Dubai and it will stop eventually. Every economy experiences cycles. Simon Williams, HSBC’s chief economist for the region said “Such a huge increase in lending is simply not consistent with economic order and stable asset prices”. Dubai’s growth is very much reliant on foreign investment. If confidence falls or if there is general tightening of monetary policy around the world that reduces investment in Dubai, it could trigger another economic collapse. Dubai is thus left vulnerable to market forces and radical swings while its lax Economic Department continues to bank on foreign trade and almost disregards the need to enhance the balance sheet.

Overall, it seems Dubai has recovered from a terrible financial crisis, but have they learnt from their mistake? Perhaps not as they keep borrowing and relying on foreign investment for growth, which delivers quick but unsustainable results. At the moment, prices aren’t quite at pre-crisis levels, as the crash drove some second tier developers out of the market for good. However, when Expo 2020 comes around, house prices could reach their pre-crisis levels and spark a bursting of the exponentially growing bubble.

Driving down Jumeriah Beach Road and Sheikh Zayed Road, it is clear to see that affluence has returned to the city of Dubai, but just how long will it stay?

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