UAE central bank warns of new property bubble

June 09, 2014 - 8:41:14 am

DUBAI: Low residential rental yields in Dubai and Abu Dhabi may indicate growing imbalances and overheating in the real estate sector, the United Arab Emirates central bank said yesterday, in the first official warning about soaring property prices.

House prices in Dubai, which nearly defaulted on its debt in 2009 after a property bubble burst, soared 27.7 percent from a year ago in January-March, leading the global rankings for a fourth straight quarter, according to consultancy Knight Frank.In some areas, prices are back near pre-crisis levels.

In an annual financial stability report, the central bank said there was no build-up of vulnerabilities in the banking system, and it did not indicate that it planned to take any concrete action towards the real estate market.

With US interest rates still ultra-low, any rate hike in the UAE still looks very unlikely, especially given the UAE dirham’s peg to the US dollar.

But the central bank’s warning was striking because authorities in the UAE almost never discuss economic risks in public,

preferring to insist that the outlook is rosy.

“Current average rental yields in Dubai and Abu Dhabi are approximately 70 and 130 basis points below historical averages, which could indicate growing imbalances — (an) overheating real estate market,” the central bank said. “Monitoring developments in the UAE real estate markets and the banks’ exposure to it remains a core financial stability priority,” the central bank added.

During the UAE’s last real estate crash, property prices plunged more than 50 percent from their peaks. They are now rising strongly again on the back of healthy economic growth and progress by Dubai’s state-linked firms in working through their piles of restructured debt.

The UAE’s economy grew 5.2 percent in 2013, the fastest pace since 2006, data from the national statistics office showed yesterday.

In the past year, authorities have taken some minor steps to head off another property bubble; Dubai doubled its fees on property transactions to 4 percent to curb “flipping”, in which investors buy and sell properties in quick succession to make speculative profits.

On the federal level, the central bank last year introduced ceilings on the mortgages which banks can offer to home buyers, although the rules were softened after intensive lobbying by the banking industry.

In Dubai, officials have said they will take further steps to cool the market if necessary, but have not said what those might be, and they have appeared reluctant to do anything which might slow growth. Dubai’s Land Department, which regulates the property market in the emirate, did not respond to requests for comment.Reuters