The real estate market in Dubai (or for that matter, the entire Gulf Cooperation Council countries, which includes the UAE – Abu Dhabi and Dubai – Saudi Arabia, Bahrain, Kuwait, Qatar and Oman), has not been a happy place to be invested in these past few years. Across the Gulf, prices are down around 30% from peak, regardless of sector or country. In this context, you might have thought that the causes of the decline would have been fully dissected and understood.
Yet, surprisingly, while there has been much discussion in the media (and a lot of finger pointing), the blame, especially in Dubai, is being apportioned to the wrong thing. In short over-building is an auxiliary, not the main, problem; the real issue is weakening demand.
Take a look at the chart below, which shows annual non-oil GDP growth and annual changes in real estate prices. No doubt, you’ll also have noticed that the two lines are highly correlated (to be exact, there is an 80% correlation). There are a couple of important reason why. Firstly, non-oil GDP growth is effectively a proxy for household and business income growth. When the rate of income growth falls, households and businesses, quite rationally, make downward adjustments to their spending and investment decisions.