The Dubai property market may have just experienced its taxi-driver moment. On the evening of 25 September, an email popped into my inbox from a representative of a local real estate agent. It extolled the virtues of buying a four-bedroom house in Jumeirah Village for just under AED5m ($1m).
There was nothing particularly striking about the proposal, although the cost a square foot is less than half the rate in completed luxury developments in Dubai. The offer entailed buying the house in installments ahead of its completion on 30 December 2009. Again, there was nothing special about that.
But what was alarming was that the payment schedule was associated with an estimate of how much the house would be worth if sold on the market at each of the seven payment installment dates to December 2009. The proposal suggested that an investor would be able to sell the house then at almost AED$10m ($2m), twice the original sales price.
This may indeed be possible. In fact, judging by the rate of increase of properties in Dubai in 2008, it may prove to be an underestimate. But there was something profoundly questionable about someone I had never met offering to help me make almost $1m in little more than a year with little effort. Perhaps it was an Eid al-Fitr present? Somehow, I doubt it.
The first point is that the document, if issued in the US or the EU, would have breached every consumer protection rule in the book. The suggestion that you could double your money or more is pure supposition and potentially disastrous for naïve investors.
But the email made a wider point. The aggressive sales campaign it reflects, smacks of the kind of extreme behaviour which, in hindsight, is often a sign that something is about to go wrong. If the deal was so attractive, why would you have to send an email to someone you didn’t know? In fact, there is nothing stopping an agent buying it.
Contrary to most expectations, the Dubai real estate market in the first nine months of 2008 has recorded the most explosive trends since foreigners were first allowed to buy property seven years ago.
Industry estimates suggest that the average Dubai house has increased in price by more than 60 per cent since the start of 2008. Modest three-bedroom homes in a Dubai suburb are now changing hands for more than $2m.
This pattern is being reflected in the rental market. It is becoming difficult to find a two-bedroom apartment in Dubai for less than AED200,000 ($54,000) a year.
The extreme increases in house prices and rents reflect an imbalance between demand and supply that has surprised everyone.
In the two previous years, 2008 was seen as the turning point for the market when a mass of new homes would lead to prices and rents decreasing. In fact, the volume of apartments coming onto the market has been much lower than expected. Demand has been much higher.
The pressure on prices is being compounded by the fact that there is probably no available vacant housing of any kind in Abu Dhabi. A growing number of people arriving in the federal capital have to live in Dubai and commute.
A final twist to the price spiral has been delivered by Dubai Municipality’s decision to prevent the occupation of rented houses in Dubai by anyone, other than single families.
It seems this has been prompted by demands from major employers for something to be done about the shortage of family housing in the emirate. But the result is an unexpected surge in the number of people seeking apartments and further price pressures.
These are likely to keep the market rising for a further six months. But eventually, there will be an effect. At levels now being reported, many professionals will be unable to afford to live in Dubai.
The problems for those seeking finance to buy a home have increased due to a rise in dirham interest rates and evidence that banks have a lower appetite for housing debt. So people who can’t afford the rent won’t be able to buy either.
The email in my inbox may prove to have been the kindest suggestion any stranger has ever made. But it is more likely that it is an early sign that the Dubai real estate party is drawing to a close and the long-forecast correction may come sooner rather than later.