The Dubai Housing Bubble: Will It Burst?

For the third time in the past 20 years, the real estate market in Dubai is witnessing significant growth, with an increase in both the number of transactions and property prices. This surge in activity raises concerns about the possibility of another housing bubble, considering the Dubai property market slump experienced by city in 2009 and 2015. So, will Dubai property market crash? To gain insights into the current buying frenzy and assess the likelihood of a housing bubble burst, continue reading.

• The Dubai Real Estate Market in 2022
• Declines in the Dubai Real Estate Market
• What Measures are Being Taken by the UAE to Prevent Housing Bubbles?
• Why Are Property Prices in Dubai Rising So Rapidly?
• Is There a Risk of Dubai Developing a Real Estate Bubble?
• What Is in Store for the Dubai Real Estate Market in 2023?

The Dubai Real Estate Market in 2022

Last year marked a remarkable milestone for the Dubai property market, achieving the highest performance in the past 12 years. According to the data from Better Homes brokerage company, property market in Dubai witnessed over 86,000 property transactions in 2022, reflecting a significant increase of 61% compared to 2021.

In total, the Dubai property market recorded an impressive 208 billion AED ($56 billion) worth of property sales last year, representing an 80% increase compared to 2021. The demand for flats remained strong, while villas also experienced a surge in popularity. It seems that Dubai property prices are not going to fall. Notably, the combined value of the three most expensive sales in Palm Jumeirah reached almost 1.2 billion AED ($320,000,000), setting new records in the market.

So, are rental property prices falling in Dubai? The rental market is also witnessing significant growth, with a 27% increase in flat rents and a notable 61% increase in villa rents. These favourable conditions are attracting investors, as the estimated yield ranges from 6% to 7% per annum. You can read more about property prices in Dubai here.

Declines in the Dubai Real Estate Market

In 2002, the Crown Prince of Dubai, Mohammed bin Rashid Al Maktoum, issued a decree allowing foreigners to purchase and own real estate in Dubai. However, it took a few more years for the emirate's laws to undergo further changes. Initially, the Dubai Land Department only facilitated property transactions for citizens of Dubai and the Persian Gulf countries. It was not until 2006 that the law granted foreigners the right to own residential real estate in special freehold zones, sparking the growth of the market. Between late 2007 and October 2008, property prices in Dubai surged by 59%. But why the Dubai property prices could be falling? However, the global economic crisis severely impacted the demand for real estate, resulting in a significant decrease in the number of transactions by nearly half, and a sharp decline in prices. In the Dubai real estate market prices of flats and offices saw a 50% drop, while villas experienced an 8% decline.

The introduction of laws in 2008 played a crucial role in preventing the exodus of buyers from real estate market in Dubai who had already entered into contracts. These laws imposed strict consequences for non-compliance with the payment schedule or refusal to make payments, potentially resulting in the termination of the contract. Additionally, the laws mandated the registration of property deals involving under-construction properties with the Land Department. Major developers also implemented restrictions on the transfer of contracts for unfinished properties, requiring buyers to have paid a minimum of 30% of the property's cost before transferring ownership.

Within a relatively short span of five years, Dubai managed to restore demand, a commendable feat considering the global crisis it faced. By 2015, property prices and sales reached their peak once again. However, this time the market was experiencing overheating, with prices skyrocketing without any apparent justification and spiralling out of control. Simultaneously, the decline in global oil prices prompted the Persian Gulf countries and their citizens to cut expenses and postpone investments. The excessive number of properties under construction led to an oversupply situation, resulting in a decline in prices. By 2019, Dubai property prices gone down by 25%.  The challenges continued as the Covid-19 pandemic struck and subsequent lockdowns further impacted the Dubai property market. However, a turning point arrived in 2021 when borders reopened, and some Covid restrictions were lifted, sparking a shift in the market's dynamics.

What Measures are Being Taken by the UAE to Prevent Housing Bubbles?

The market's overheating in 2015 prompted the local authorities to implement anti-crisis measures. In order to safeguard the market from speculators, the UAE raised the fee for transferring ownership rights from 2% to 4% and imposed limitations on mortgage sizes. These measures aimed to make it more challenging to purchase and quickly resell unfinished real estate. Additionally, genuine buyers received assurances and guarantees from the authorities:

• Developers are now held accountable for failing to meet construction deadlines, with penalties imposed for delays exceeding 6 months. In cases of prolonged construction delays, where projects are significantly behind schedule, the authorities have the power to reassign the project to another developer.
• The developer is required to deposit all funds received from buyers and sponsors into a dedicated margin account. These funds can only be utilised for the construction of the specified property, ensuring transparency and safeguarding the buyers' investments. 
• The developer is only permitted to sell properties during the construction phase if they own the land plot on which the development is taking place.
• The developer is required to provide a performance guarantee by keeping 10% of the project's cost in an escrow account for a minimum of one year after the completion of construction. This fund serves as a safeguard to address any potential flaws discovered during this period, with the allocated money being used for necessary repairs or improvements.

Why Are Property Prices in Dubai Rising So Rapidly?

The global coronavirus pandemic has ushered in a new phase of growth, which continues to thrive. Several factors have contributed to this upward trend:

• Mass-scale vaccination and opening borders to tourists in 2021.
• Decrease in construction speed during the pandemic. The demand significantly exceeds the supply, so property prices are rising.
• There is now the possibility of getting a residence visa for the entire family. Read more on visa types and residents’ advantages here. 
• The global situation has led to an increasing demand for rental and residential real estate among foreigners. Dubai's safety and stability have become particularly appealing to expats.

Due to these factors, the rental yield on residential properties in Dubai is increasing, which is attracting a growing number of investors to the city.

Is There a Risk of Dubai Developing a Real Estate Bubble? 

The UBS Swiss bank closely monitors global real estate markets and has been publishing the Global Real Estate Bubble Index since 2015. Cities are ranked according to several key factors, including:

• The risk of developing a housing bubble.
• The market being overpriced.
• The market having fair prices.

In the record-breaking year of 2022, Dubai secured a place in the green zone of fair prices, ranking 24th out of 25 with a quotient of 0.16, according to UBS. This indicates that Dubai does not show signs of developing a property bubble, in other words Dubai real estate market is not going to crash. In comparison, Toronto ranked 1st with a quotient of 2.24, raising concerns. It means that Toronto, unlike Dubai, is more probable to face property market crisis. Other cities like Hong Kong, Amsterdam, Tel Aviv, and Tokyo are also in the red zone, indicating overpriced real estate and a higher risk of a market crash.

According to experts from the bank, the Dubai real estate market has made a significant recovery, with property prices currently standing at 25% lower than the peak recorded in 2014.

What Is in Store for the Dubai Real Estate Market in 2023?

Will Dubai property prices rise in 2023? Based on the initial months of this year, property prices in Dubai have continued to rise. The demand for housing remains strong, with both flats and villas being purchased by buyers. In February, experts from Property Monitor reported a remarkable sale of a nine-bedroom penthouse in the prestigious Bulgari Lighthouse on Jumeirah Bay Island for $112 million.This circumstance shows that Dubai real estate market is far from the slump. It is worth noting that the building is still undergoing construction and is expected to be completed by 2027. It means the buyers are not afraid that Dubai property developer can go bust. Standard apartments in the tower typically feature four or five bedrooms, while the most luxurious option is a three-story penthouse with its own spa and gym located on the rooftop.

According to Forbes analysts, the Dubai property market is not going to crash, but rather experiencing a slowdown in growth to around 4.5%. This situation is indicative of market stabilisation. Conversely, experts from Zoom Property Insights anticipate price growth of up to 20%. They believe that the global economic situation and increasing tax burdens will motivate Europeans to seek a more comfortable place of residence, potentially driving demand. Additionally, the recent lifting of Covid restrictions in China in January 2023 could contribute to market growth through an influx of tourists, residents, and investors from that region.

In a Nutshell

All in all, is Dubai real estate market crashing? Dubai's real estate market is currently not experiencing an overheating trend, as housing prices are 25% lower than their peak in 2014. The recent increase in prices and number of transactions can be attributed to factors such as successful COVID-19 vaccination efforts and new visa regulations for individuals interested in living and working in the UAE. Experts suggest that Dubai does not pose a risk of developing a housing bubble and that the market is expected to remain favourable for real estate investments in the coming years. In other words, Dubai property prices are not going to crash. While some researchers predict a slowdown in price growth, others anticipate a 20% increase in prices by the end of 2023. The lifting of COVID-19 restrictions in China may also contribute to heightened demand from buyers, further intensifying the market situation and postpone the dubai property market recession.

Cover photo: Sketchepedia (Freepik)