New Bubble Burst Warnings Urge Change

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With the rapidly rising property prices in Dubai, fears of a bubble burst in the real estate sector have become a hot topic among industry participants. According to Abu Dhabi Islamic Bank’s (ADIB) chief executive, Tirad Al Mahmoud, the current combination of speculative trading and low interest rates causes an elevated inflation rates. During the past six months, higher inflation rates were recorded in UAE on monthly basis. Al Mahmoud explained to a local news website that low interest rates prompt traders to seek higher profits in short term and this scenario may create favorable conditions for a new bubble burst.

In addition, financial experts believe that the threat which hides high evaluation should not be underestimated. The biggest assets management company in the world, Black Rock, for instance, saw speculative influence in UAE’s stock valuations. Also, the insurance company AXA Gulf announced that it will re-evaluate its holdings on the country’s stock market.

Al Mahmoud says that banks can spot speculators among true consumers. Therefore, they can easily decline mortgages to flippers. But on the other hand, banks are in the lending business for profits. In addition, ADIB’s chief executive also believes that the government decision to increase Dubai’s real estate transaction fees is just a step towards preventing the negative trend.

According to Tirad Al Mahmoud, the government should also create a property rental board which could regulate prices in the sector. During the past six months only, rents in Dubai’s prime locations doubled and continue to rise causing real troubles to a large number expats. Although establishing rental board is a practice that is usually followed in advanced markets, Al Mahmoud explains that it should be adopted by the United Arab Emirates too. The reason for his suggestion is that UAE is not a typical frontier or emerging market and it actually resembles more of an advanced one.

The local economy is still in the process of recovering from the financial crisis of 2008. After it was hugely affected by debt crisis, the country’s economic growth rose by over 4% in 2013. Valuations of both the stock and real estate markets jumped thanks to Dubai’s World Expo 2020 win, low interest rates, as well as numerous government-supported infrastructural investments. The decline witnessed in other emerging markets, as well as the winding down of the US Federal Reserve monetary stimulus, turned the UAE into a hotspot for investors. However, hot money are also very active, although famous for being unreliable.

In 2013, the main benchmark index of Dubai increased its value by 106%. Moreover, over the first few months of 2014, the DFMGI  jumped by nearly 30%. As a result, it became the top-performing equity index worldwide. Abu Dhabi’s bourse also advanced by 11%.

However, Tirad Al Mahmoud warns that despite all that, the country might lose its reputation of an attractive business destination. According to him, the already expensive equity and elevated property prices will turn the United Arab Emirates into a less competitive business spot. The chief executive shares that if valuations continue to climb, the cost of running a business in the country will lose its luster. The more property rents continue to increase, the more unattractive the country becomes to businesses.

In addition, it must be noted that the extremely high cost of living for expats doesn’t bode well with personal goals and expectations. Many people are already struggling not only with the rising rents, but also with elevated education cost and increased consumer prices. By the end of June when the school year will end, it won’t be a surprise to find many expat families living UAE.

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