Is Dubai real estate housing sector a bubble risk?

Is Dubai real estate housing sector a bubble risk?  Experts analyses sector amid price rises, massive demand and supply increases.

The UBS Global Real Estate Bubble Index analyses risk of housing investment risk in Dubai, Singapore, London, New York and leading cities around the world

Dubai real estate

The buoyant Dubai real estate sector has seen residential property prices increase 17 per cent in the past four quarters and an increase of 40 per cent since 2020, according to global wealth manager UBS.

Amid the impressive price gains, any investment can see values decline as well as increase, and UBS has investigated the possibility of a housing bubble risk in Dubai and other leading cities in the world.

The risks of housing bubbles in the cities analysed in the UBS Global Real Estate Bubble Index have, on average, decreased for the second consecutive year.

Dubai real estate housing bubble risk

Despite recording the strongest increase in the risk score of all the cities analysed, the chance of a housing bubble in Dubai is only moderate, according to the UBS Global Real Estate Bubble Index.

Miami shows the highest bubble risk among the cities in the study. High bubble risk can also be seen in Tokyo and, despite a significant decline in the score compared to last year, in Zurich.

An elevated risk of a housing bubble is evident in Los Angeles, Toronto, and Geneva.

Only a moderate risk is recorded in Amsterdam, Sydney, and Boston. In the same risk category are, after very strong reductions in imbalances, Frankfurt, Munich and Hong Kong. Vancouver, Dubai, Singapore and Madrid complete this group of moderate-bubble-risk cities.

According to the Index low risk of a real estate bubble is evident in San Francisco, New York, and São Paulo.

In Europe, after further declines in the index score, London, Paris, Stockholm, and Milan also fall into this low-risk category. Bubble risk in Warsaw remains low as well. São Paulo shows the lowest bubble risk among the analysed cities.

Dubai luxury real estate market

Dubai housing bubble risk in detail
The UBS report said: “Dubai’s real estate has been in high demand since 2021. The market has benefited from accelerating population growth, especially from regions where the investment climate has deteriorated in recent years.

“Underpinned by a dynamic economy in the Emirates, household incomes have recorded strong growth since 2021, surpassing all other analysed cities.

“Moreover, given a high proportion of cash buyers, higher interest rates have had a lesser impact on the market than elsewhere.

“Strong demand has helped absorb a considerable supply expansion. Residential transaction volumes have recently reached a record high. The 17 per cent price increase in the last four quarters outshone the home price developments in all other cities in the study.

“Prices in Dubai are now 40 per cent higher than in 2020. Despite the strong price growth, rental yields remain very attractive at 6-7 per cent. This is due to a 60 per cent increase in rents in real terms.

“As a result, the bubble risk in Dubai is moderate. However, the city experienced the strongest bubble risk score increase among all cities analysed in the report over the past four quarters.

“Strong price increases have been driven partially by speculative demand, and by a high proportion of off-plan sales.

“Additionally, the luxury segment is increasingly overvalued, in our view. Price swings are likely in the short term. Over the medium term, an economic recession and a lasting oil price drop are the main risks to the residential market.

“Moreover, supply continues to expand relentlessly: by 2029, the housing stock is likely to have grown by a third. This puts prospects for long-term price appreciation into question”.

Miami
Miami is the most at-risk city of a housing bubble burst according to UBS
The global housing bubble risk perspective
In global perspective, inflation-adjusted housing prices in the cities analysed are now on average roughly 15 per cent lower than in mid-2022 when interest rates started to surge globally.

Claudio Saputelli, Head Real Estate at UBS Global Wealth Management’s Chief Investment Office, said: “The cities recording the strongest price corrections are those that displayed a high risk of a real estate bubble in previous years.”

Real prices in Frankfurt, Munich, Stockholm, Hong Kong, and Paris are below their post-pandemic peaks by 20 per cent or more. Vancouver, Toronto, and Amsterdam recorded sharp price declines of around 10 per cent in real terms.

Overall, the last four quarters were characterised by muted housing price growth. But strong corrections continued in Paris and Hong Kong.

In contrast, in the sought-after locations of Dubai and Miami, housing prices surged further. Also, in a few cities with pronounced housing shortages, like Vancouver, Sydney, and Madrid, real prices increased by more than 5 per cent compared to last year.

Dubai outperforming global markets

On average, a skilled service-sector employee can afford 40 per cent less living space than in 2021, before the rise in global interest rates.

Current price levels seem far from sustainable at prevailing elevated interest rate levels—especially in markets with high homeownership rates. However, a significant deterioration in affordability does not necessarily cause a price correction.

An increasing housing shortage, reflected in rising rents, helped stabilise many urban housing markets. Real rents have increased by 5 per cent on average over the last two years and have outpaced income growth in most cases.

In most of the cities analysed rental growth has even accelerated in the last four quarters. No relief is coming from the supply side, as high interest rates and increased building costs have weighed heavily on housing construction.

Building permits have declined in most cities over the past two years.

The momentum in the housing market is set to improve. Rising rents underpin demand for home ownership in urban areas.

Falling interest rates will shift user-cost advantage back to buying. First-time homebuyers would return to the market as affordability improves.

Matthias Holzhey, lead author of the study at UBS Global Wealth Management, said: “Real housing prices in many cities have bottomed out. The economic outlook will likely determine whether prices once again surge or rather track sideways”.

Dubai real estate this week