Cracks are starting to appear in the resurgent United Arab Emirates homes market as the nation’s central bank warns against overheating and a property bubble.
The bank is concerned as Dubai property prices have surged by almost 28% year on year to the end of March 2014.
In an annual ‘statement of account’ for the UAE, the bank also voiced worries of a growing ‘imbalance’ between rents and property prices in Dubai and Abu Dhabi.
According to international property consultants Knight Frank, Dubai property prices have been ahead of the rest of the world for around a year, with some prices reaching 2008 levels before the last property bubble burst.
However, the bankers explained that despite monitoring the market, they intended to take no action as they could find no evidence of problems in the UAE banking system.
Property taxes
In 2009, property prices in Dubai crashed by almost 50% and the emirate was close to defaulting on debt based on property speculation before a bail-out from oil-rich Abu Dhabi.
Home prices are rising again, fuelled by aggressive economic growth that has sprinted to around 5.6% a year – increasing at the fastest pace for more than five years.
To take the heat out of the property market, the government has tinkered with property taxes and mortgages to discourage speculators, who were blamed for the last bubble.
Property speculators were snapping up apartments and villas in the city as off-plan investments and many were sold on before they were built for hefty profits.
Mortgage controls
The government and central bank have hinted firmer action could be on the way, but have refused to disclose what action they may be considering.
Recently, the International Monetary Fund cautioned the government that property speculation was becoming rife again and that mortgage controls would not curb the rush for profit as most of the investors were cash buyers.
One indicator supporting this view is an analysis of real estate lending.
UAE banks report a 10% leap in mortgage lending but a 40% jump in construction loans.
The central bank also noted that any rise in interest rates in Dubai or Abu Dhabi were unlikely this year as the local currency is pegged to the US dollar. The US Federal Reserve has already stated that interest rates will stay at their current level until at least early 2015.
