Is Dubai real estate heading towards a bubble?

Is Dubai real estate heading towards a bubble?

Over the last few decades Dubai has successfully managed to diversify its economy from oil to tourism, technology, business services, and real estate. Dubai’s economy is expected to grow 3.8 percent in 2020.

Fluctuation of supply and demand in the real estate sector is a common phenomenon, one following the other. Dubai real estate market witnessed oversupply for the last few years leading to a price-drop.

The drop in prices made the property prices more affordable. Reuters quoted Shaji Jacob, the CEO of Middle East Business at Anarock Property Consultants, “The Dubai realty market is witnessing a market correction as property prices are adjusting to the increased new supply. This benefits consumers who may have previously aspired to own a property but were priced out.”

Lower prices lead to higher property sales in Dubai, which in turn helped the economy grow.

Considering the price fluctuations, the observers and investors started to question if this is due to a bubble in the Dubai real estate sector.

What is a real estate bubble?

A bubble in property markets means a sustained, substantial incorrect price of an asset. Bubble remains a perception until it bursts. In the real estate sector, price bubbles are a frequent phenomenon.

The highly respected UBS Global Real Estate Bubble Index 2019 notes about Dubai, “Affordability has improved even though incomes have declined amid slower economic growth. Despite posting the strongest population growth among all cities in the study, the market remains oversupplied. Easier visa requirements and next year’s Expo should support the market.”

According to the UBS study, the city whose inflation-adjusted price growth rates is greater than 1.5 percent have bubble risk, and city having 0.5 – 1.5 inflation-adjusted price growth rates are overvalued, and the city having -0.5 – 0.5 inflation-adjusted price growth rates are fair valued.

According to the index, the seven top bubble risk cities are Munich (2.01), Toronto (1.86), Amsterdam (1.84), Hong Kong (1.84), Frankfurt (1.71), Vancouver (1.61), and Paris (1.54). The Lead Author of the study, Matthias Holzhey said, “Investors should remain cautious when considering housing markets in bubble risk territory. Regulatory measures to curb further appreciation have already triggered market corrections in some of the most overheated cities.”

In contrast to these cities, Dubai’s score of -0.26 grades it as fairly-valued, meaning it is far from any hint or indication of a bubble.

With the Expo 2020 just months away, and the strong sales figures of Dubai real estate due to very attractive prices for the masses, the sector is bustling with demand from international and local investors and owners alike.

Picture credit: Photo by Lucas Insight from Pexels

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