Dubai Faces Hit As Property Boom Fades
This city's six-year property boom appears to be over, with asking prices for some homes falling as much as 19% in October from the previous month, according to a closely followed survey.
The property market here isn't important just to buyers, sellers and lenders. The government, through a handful of big developers, is the largest player in the sector. A sharp slowdown could crimp its financing as worry grows about its ballooning foreign debt.
Home prices were climbing sharply as recently as the first half of this year. But over the summer and fall, tightened local lending collided with the global financial crisis to choke off easy credit. That scared away buyers, especially local and international speculators who have helped fan years of price increases.
Other factors were at work. Dubai has been rocked by a series of arrests and probes at several big property developers and financial institutions. No charges have been filed, but the dragnet alarmed investors. Government officials moved to tighten regulations in order to slow down run-away speculation and property flipping.
Analysts at HSBC Holdings PLC said Wednesday that the average asking price for homes in Dubai fell 4% in October from September. Advertised prices for upscale Dubai 'villas,' typically stand-alone homes in a master development, fell by 19% month-on-month, the bank found. In next-door emirate Abu Dhabi, average home prices fell 5%.
The report included only prices for the so-called secondary market, which includes second-hand homes and unfinished property that investors bought from developers in the hope of selling quickly for a profit. The report didn't include prices for property sold directly by developers.
Property agents here have been warning of softening prices and disappearing buyers for weeks. But the HSBC report provided the first quantitative evidence of a significant correction. The bank warned of 'protracted weakness should lending practices remain in place for a while.'
Banks have significantly tightened lending, requiring bigger down-payments and raising mortgage rates. HSBC said the average down payment increased 125% in the month, to more than $220,000. Mortgage rates increased by as much as two percentage points.
Dubai's economy is significantly dependent on its property market, which the government opened to foreign investors in certain developments in 2002. A handful of government-owned or controlled developers have borrowed heavily amid a construction boom.
In today's global credit crisis, they may have difficulty raising fresh funds if revenues decline significantly. That has raised larger fears about Dubai's ability to repay its debt. The city-state doesn't have the large reserves of oil that many of its Middle East neighbors enjoy. Instead, Dubai has financed its economic diversification with international borrowing by the government and by government-controlled corporations.
Dubai officials have said in recent weeks that government finances are sound. Analysts say the oil-rich federal government of the United Arab Emirates, based in Abu Dhabi, would lend a lifeline in a crisis.
Dubai stocks have taken a pounding, driven down by property and financial shares. The Dubai Financial Market finished Wednesday down 62.7% year to date. Shares in Emaar Properties PJSC, a partly government-owned developer that is building the world's tallest skyscraper here, finished down almost 79% from its 52-week high in January.
The government and developers have scrambled to reassure investors. On Wednesday, Emaar said in a statement it would relax payment plans for customers in a bid to attract new buyers. An Emaar representative didn't immediately respond to phone and email messages. |
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