In a bid to avoid the ‘oil curse’, Dubai embarked on diversifying its industries. The emirate’s growth is currently associated more with diversification than its rich reserves of gas and oil.
To many, the real estate industry is one of the best performing non-oil industries. Sadly, after enjoying a six-year boom, the real estate business hit its lowest point in 2010. Surprisingly, Dubai is among the most attractive real estate markets right now. However, economists see this boom as a sign of another bubble.
In 2008, Dubai’s property prices increased sharply before falling by over 50% between 2009 and 2010. This bubble burst triggered a debt crisis. A housing bubble occurs after prices of property increase drastically due to speculations, increased demand, and hope that recent history is a true reflection of the future.
A bubble starts with an increase in demand. Subsequently, speculators fuel the demand further by engaging in short-term transactions with the aim of making an instant kill. After some time, supply increases, but demand falls or stays constant. What follows is a sharp drop in prices. Consequently, the bubble bursts leading to debts evasion and loss of investments.
Current activities in Dubai are an indication of a property bubble. Recent records indicate that home prices have increased by 21.7 %. If this upsurge is not checked, the housing sector may lose million due to an impending drop in house prices and an escalation in mortgage defaulters.
As a result, Dubai’s financial sector will face unprecedented strains. To correct this looming tragedy, Dubai has started regulating its housing sector. For instance, most transaction fees have been raised in an effort to lower the demand and stabilize property prices.