After the UAE Central Bank released a statement that flagged Dubai's property market as a major potential threat to the economy, concerns about a looming asset bubble have been mounting. So what is the government doing to avert a 2008-like crash this time?
Last week, the Central Bank announced that the real estate sector of the glitzy Emirati city was "overheating" and there were "growing imbalances" in the housing market. Lending activity also rose 12 percent in 2013 with about 30 percent of the home purchases being funded via mortgage loans.
The report caused quite a stir among investors, but the government is asking everyone to calm down. According to Reuters, officials are aware of the dangers that the housing market poses and have ensured that they are taking certain steps to rein in a bubble.
Indeed, the government has doubled property registration fees and also increased down payments for new home purchases. But how much of that is working? Somewhat! Home prices continued to rise but the pace slowed down with average costs rising by 3.4 percent in the first three months of 2014, Emirates 24/7 reports citing a Knight Frank report.
But experts say the government needs to strike while the iron is hot.
"It's too early to be calling top, but credit growth of that pace tells you that the cycle is accelerating rapidly," said Simon Williams, chief economist for HSBC Dubai, to Reuters.
"...The time for policy action is now, before bubbles really get going, not when they are already in place."
"The UAE, especially Dubai, for sure, cannot afford another boom-and-bust cycle, which can derail a broad-based recovery gained through painstaking restructuring and asset sales. If the high-rise Dubai property market collapses again in a crippling crash, the debris will be strewn not just over the region, but the wider global markets," The Gulf Times writes.
The Global Asset Bubble
But Dubai is not the only area with a real estate problem. China and Britain are also running for the asset bubble burst.
The International Monetary Fund launched a global property website last week to monitor home prices across the globe. It claimed that global home prices were rising at a fast pace with about 33 out of the 52 surveyed countries showing an increase in prices.
"Housing is an essential sector of every country's economy and has systemic implications, which is why we at the IMF are focusing on it not only in individual countries but on a cross-country basis," the organization explained adding that the "tools for containing housing booms are still being developed. The evidence on their effectiveness is only just starting to accumulate. The interactions of various policy tools can be complex. But all this should not be an excuse for inaction. The interlocking use of multiple tools might overcome the shortcomings of any single policy tool. We need to move from "benign neglect" to an "all of the above" approach when it comes to policy choices."
