UAE Bank Warns That Dubai’s Property Market May Crash

The property market in Abu Dhabi and Dubai has shown the first signs of instability, with the central bank of the United Arab Emirates warning that the market …

The property market in Abu Dhabi and Dubai has shown the first signs of instability, with the central bank of the United Arab Emirates warning that the market may crash if prices continue to rise at the current rate.

House prices in Dubai have increased by 27.7% in comparison to the prices from the same period 12 months ago, which meant that Dubai still lead the global property price index for a fourth straight quarter, as reported by property consultants Knight Frank.

The UAE Central bank stated in their annual financial stability report that there were no vulnerabilities within the banking system and there was no clear indication that any action would be required towards the real estate market.

There is still no sign of an increase in the interest rates in the UAE due to the fact that US interest rates are still low and this is also backed up by the UAE dirhams comparison alongside the US Dollar. However, the warning given by the Central Bank was unusual as it is common practice for the authorities in the UAE to keep economic risks out of the public domain, but in this case they decided to make it public. The Central Bank have pointed out that the average rental yields in Dubai and Abu Dhabi are around 70 and 130 basis points lower than previous averages, and these figures indicate that there is an instability in the real estate market.

When the last real estate crash occurred, property prices in the UAE dropped by over 50% but they are now increasing again, boosted by the growth of the economy and the way in which Dubai’s state-linked firms have dealt with and worked through the debt. The results of this has seen the UAE economy grow by 5.2% in 2013, which is the quickest growth since 2006.

Over the course of a year, the authorities have done all they can to stop another property bubble, to achieve this Dubai doubled all fees on property transactions to 4% which was done to ward off the possibility of “flipping”. This is when investors purchase real estate and sell quickly to make a profit.

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The UAE Central Bank have also implemented a limit on the mortgages that banks are able to offer to home buyers, however the banking industry were against this, which resulted in the rules being slackened ever so slightly. Officials have made it clear that they will do all they can to cool the market and further action will be taken if necessary. It was not clear whether the statement from the Central Bank warned of a new approach but many felt that further action would be required.

There are regulatory changes expected in Dubai and Abu Dhabi, and any regulations that are introduced are brought in within the off-plan market which affects property bought and sold before being built on. Speculation in these areas is starting and so it is rapidly becoming an area that has to be focused on.

Dubai was warned last month by the International Monetary Fund that its Government and state-linked companies will have to pay back a debt of more than $50 billion by 2016 and to do this, it is recommended that they take action to try and prevent any more speculation in the media.

However, the introduction of the new mortgage limits is thought to have had a minimal effect on the speculation, as the majority of them are cash buyers. Despite the risk of unpredictable prices, fresh action may have to be taken in order to ease the rise in prices to help stop Dubai from being less competitive against other similar areas in the region such as Qatar.

The rise in prices in the residential market in Dubai has been noticed by those that create policies and they appreciate that the rise could make Dubai less competitive when it comes to doing business.

The UAE Central Bank confirmed that in the months leading up to the property crisis in the UAE in 2008, the market recovery, as it currently stands, had not experienced any rapid credit growth. The exposure of banks to the sector amounted to Dhs287 billion which is less than 23% of all loans.

Lending that was linked to the real estate market grew just above 10% which is one percentage point higher than the total loan book growth. However, construction loans in the UAE has increased massively, jumping to 40.1% in December which was the highest since 2009. Lending by banks for the purchase of residential property rose to 12% in 2013 and the Central Bank stated that this was not the real cause of the increase in real estate prices. This shows that banks were involved in funding the recovery of the real estate market, but the banking sector only accounted for 30% of the residential properties that were purchased in 2013. Analysis shows that the recovery of the market is mainly attributed to the fact that many buyers are equity buyers or are reliant on external funding.



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