Dubai’s residential market was so overheated in 2013, a real-estate listing company hung an advertisement down the length of a prominent office building proclaiming “Keep Calm, There’s No Bubble.”CAREN FIROUZ/Reuters
This story is part of an ongoing series on global property that examines the shifts and trends in the housing market on the international stage.
Dubai is about extremes: the record-breakingly high Burj Khalifa skyscraper piercing the desert sky, the housing developments on palm-shaped artificial islands splaying from the shoreline into the Persian Gulf.
But the emirate's ruling administration stepped in over one extreme: real-estate prices.
The city's residential market has gone from boom to correction in the past two years. Toward the end of 2013, a Dubai real-estate listing company hung a massive advertisement down the length of a prominent office building. Riffing off the British "Keep Calm and Carry On" meme, the ad proclaimed "Keep Calm, There's No Bubble."
At that time, prices were running rampant. Dubai had been named the host for Expo 2020, and the market was rife with speculation about all the infrastructure boom and rising demand that the expo would bring.
"People had just gone mad. And prices, I have to say, from the tail end of 2013 up until about the summer of 2014, were going up too rapidly, and this bubble was definitely forming," said Mario Volpi, head of projects at Asteco Property Management in Dubai and a regular commentator on real-estate trends in the city.
The Dubai administration then imposed measures to dampen the market, causing sales to drop. And this trough continues. "The secondary market is definitely going through a period of correction," Mr. Volpi said.
The government raised the transfer fees for concluding a property sale from 2 per cent of the purchase price to 4 per cent. Part of the aim was to deter speculative buying from absentee investors, but it inevitably also hurt locals simply looking for a new home.
"The government put this in place to stop people from speculatively buying, but of course you have ordinary people that get caught up in that – 'I want to buy because I want to live in it, but I still have to pay 4 per cent rather than 2 per cent,' " Mr. Volpi said.
Also, mortgage caps were imposed to restrict borrowing. Buyers not from the emirates must pay a minimum of 25 per cent down, or 35 per cent down for homes worth more than 5-million United Arab Emirates dirhams (about $1.8-million Canadian). For Emiratis, the limits are slightly easier: 20 per cent and 30 per cent, respectively.
Then add to that another 2 per cent in estate agent's fees.
So, for an average property, this quickly can become a major hurdle for foreign buyers who are forced to pay such high upfront costs.
"And with the odd one or two incidentals, you're talking about 31 per cent to possibly 32 per cent of a purchase price having to be funded by your own funds. ... That's a big sum to find. And that's definitely had a cooling effect," Mr. Volpi said. A typical one-bedroom apartment fetches about $350,000 to $400,000.
At the same time, new developments are having to come up with unusual ways to attract buyers, with elaborate architecture and payment plans that are attractive to home buyers. "I wouldn't say it's struggling as much as the secondary market. However, developers are having to be very creative in how they entice people to part with their money," he said.
Although the city is dominated by apartments, roughly 30 per cent of the residential market in Dubai is made up of houses and villas. They have been hit by the same cooling conditions as apartments, maybe even harder. The Emirates NBD Bank PJSC noted that over the summer, nearly 57 per cent of real-estate agents in Dubai reported lower apartment prices, whereas 62 per cent reported lower sale prices for villas.
Business has slowed for agents, many of whom make money primarily on commissions. More than half said they received fewer inquiries from prospective buyers this summer. Queries from international buyers fell particularly sharply, the report said.
The rental market is a different story. About 40 per cent of agents saw more apartments being rented in the summer. Apartment rental prices have also been rising. The feeling is that demand is still there, but buyers appear to be renting rather than buying.
As Emirates NBD put it, "the relative firmness in [the] rental sector suggest that population dynamics remain supportive of the real estate sector overall."
Some of the biggest price declines have been in the fancier neighbourhoods. As the real-estate company CBRE Group Inc. noted in its report on Dubai's second-quarter trends, "the largest value drops were recorded in prime areas, with more affordable locations in many cases outperforming."
Some have been calling this a correction. Mr. Volpi said that's apt. Others have also said the market is maturing, but that's open to debate in a market so glitteringly new. Dubai has only been openly welcoming international buyers for 12 or 13 years, Mr. Volpi added. A government decree giving foreigners the right to own freehold property (that is, property solely owned by its owner and not leased by the government) was only granted in 2002, with the law officially approved in 2006.
But restrictions still apply. Property owners from outside Gulf Cooperation Council countries (in other words, foreigners not from Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) are only able to buy property in freehold property areas. That doesn't restrict non-GCC foreigners from living anywhere they want outside of freehold areas. They just can't buy property in those other areas.
But many, if not most, of the coveted parts of the city are freehold areas open to foreign buyers, Mr. Volpi said. "I think it's just a way of the country keeping a little bit of control over its property," he said.