House prices soar in Dubai

27 August 2013

Sharp price rise rekindles concerns of Dubai real estate market overheating

House prices in Dubai increased by nearly a third during the first half of the year driven by both domestic and international demand, according to a report by the Dubai office of UK property consultancy Cluttons.

The consultancy said average property values in the emirate climbed 30.6 per cent between January and June this year, while average rents rose 11.3 per cent. On the back of these increases, property values are now 36.9 per cent higher than they were at their 2009 market low.

Clutttons said the factors behind the growth are different from those that drove prices to the market peak in 2008. In the current cycle, Dubai is benefitting greatly from its perception as a safe haven for refugee funds from elsewhere in the region.

Furthermore, domestic demand is on the rise, fuelled by increased job creation, favourable lending rates and soaring rents. This increase in rental rates is driving some tenants to consider the option of home ownership as a way to avoid being caught out by rising accommodation costs.

“The acceleration in residential capital values this year has been underpinned by robust levels of job creation and a rising population, rather than being fuelled by ‘fly-buy’ dealers, as was the case in the past,” says Steve Morgan, head of Cluttons Middle East.

Although Dubai’s current real estate market boom appears to be based on stronger fundamentals, a recent report by the Dubai office of US property consultancy CBRE cautioned that rents were rising faster than wages in the emirate, which could eventually make residents and companies reluctant to come to the UAE.

“The residential sector is showing increasing signs of overheating with lease rates rising far too quickly to be justified by the current economic environment, as rental growth significantly outpaces growth in wage levels,” said Matthew Green, head of research for CBRE’s Dubai office.

“The result is the rising cost of living, which could start to impact on Dubai’s competitiveness if sustained at current levels for too long.”

The Washington-headquartered IMF also recently weighed in on Dubai’s property market, warning that the government might need to step in to prevent another boom-and-bust cycle. “It’s too early to speak of a bubble now, but if prices increase at this pace, over time there’s certainly a risk there would be a new bubble forming up,” said Harald Finger, IMF mission chief to the UAE.

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