On the sidelines of the Big News there are two stories making the rounds: Dubai property and Dubai debt. In the grand scheme of things Dubai is a pretty small place (the economy is about 45% the size of Singapore), but it’s interesting from the perspective of bubbles. Now that the initial chaos of the bubble bursting has worn off, it’s possible (perhaps) to plot what might happen next.
Property Prices
Depending on who you talk to, “freehold” property prices either halved or went down 70% between October 2008 and March 2009.
(“Freehold” is property that foreigners can buy which currently accounts for about 30% of the stock in Dubai), here’s a chart of who lived where in Dubai 2008:
The point there is there are three markets, they go in different directions.
The main reason for the bubble was that the “foreigners” market is a 90% a rental market, and less than 20% of the residual are “high flyers” with a second home; in 2005 there was a huge demand for new accommodation because of economic growth plus the start of the freehold construction boom; that had to be accommodated by new units, and the rents of those went through the roof.
Existing accommodation lagged, so you could find one apartment in a building renting for $25,000, (since it had been rented a few years before and there was implicit and later explicit rent control for incumbents), and a newly vacated one next door being rented for $75,000; and being snapped up.
So the buyers only saw the rents on the (new) stuff on offer, and they thought “OK I’ll buy at a 7% gross yield or so, and that’s not counting for the “fact” that in Dubai house prices will go on going up forever”, Whoopee!!
But that price wasn’t a true reflection of market reality, and as soon as new units started coming on line (plus the economy slowed), reality was restored; yields didn’t change, just rents went down.
The rate of development of “new” accommodation is on the right on the chart, the current situation is that construction almost stopped (buildings under construction typically got finished, but a lot got cancelled although it’s not clear how many did).
The consensus projection in 2008 was 70,000 new units in 2010 (that’s not hard you just need to be able to count…
