House Prices Could Plunge by 70pc: UBS

Just want to know the breakup of the land price and concreet price. Six months back these people have said cost of construction is AED600 per sq. ft in Dubai whereas in Mumbai its AED 140. Since then the building material price has fallen by 50%. Moreover due to fall in trade, the shipping cost has come down in DUbai. So the cost of construction should be approaching pairity with Mumbai. Add the colapse in the land price, the cost price should not be more than AED 250-300 per sq ft. This level is to be attained either timewise or price wise. SO if the prices have to come to AED 500, that means long period of stagnency after the correction has taken place to those levels. Add the leverage in the system (i.e The builders and buyers) and the coming debt deflation or forced debt liqidation. All this is going to push the price to abnormal levels.

This is scenario building on negative sideeffects. However if we add the quality of Infrastructure in the city, low cost of energy , law and order in the country, hasselfree interaction with the government agencies, low pollution levels, the business opportunity in the region, this has its premium. All the above go to add up to the intangibles in the property prices. People from chaos countries wold continue to look towards Dubai for an alternate home.

Such reports have always been there and will continue to play with the mass psychology as one of the best citystate of this century passes through the gestation pain.

Prices may well fall 70%. They did in supply-constrained Hong Kong in 1997 and that was during a period of net immigration from Mainland China. Prices of property peaked in October 1997 and with the exception of luxury homes, those who bought between Oct 1996 and the top were still in negative equity 9 years later. The same was true of Singapore.

Dubai bulls face three very powerful counter arguments:

First, the average length of a house price crash during banking crises is 4-5 years, not six months – as shown by the IMF’s former Chief Economist, Ken Rogoff. http://www.economics.harvard.edu/files/faculty/51_Aftermath.pdf

Second, USD is significantly stronger than this time last year. It is 20% stronger against the euro, 25% stronger against the Indian rupee and 40% stronger against the Russian ruble. In USD terms, Dubai property is still expensive and income growth in overseas buyer markets is down sharply.

Three, banks here still have high loan-deposit ratios. There is little chance of a major increase in personal and consumer lending any time soon. Unless savers start running down their balances and going on a binge, a prospect that seems rather unlikely in the current climate, it is inevitable that tough times lie ahead.

Prices have undoubtedly dropped significantly but does anyone think there may be a little bit of self interest in banks claiming prices will drop to a certain level....they operate funds that want to buy distressed or cheap assets and then make a profit out of them. It is in their interests to talk down the market and scare people - it is the same as them shorting the stock markets. The market already seems to be stabalising in terms of less people losing jobs and people moving businesses in due to the cheaper costs generally (I heard of 3 business relocating 1000 people to Dubai due to increased UK taxes). The banks are starting to lend again and interest rates may come down a bit over the next year or two. This is an immature market which has gone through a vicious maturing process but demand will return, especially as the dollar will drop in value and business confidence returns. Don't let the the banks scare you into selling unless you absolutely have to.

If you look at prices in the Burj Dubai then the 70% fall in prices is already evident, so this is hardly a forecast in that case. Whether these price falls spread to the rest of the market is a matter of debate but at the moment it does not look good, see:
http://arabianmoney.net/2009/04/22/how-low-can-dubai-property-prices-go/

Some great comments on this report, especially the one by Mark McFarland. I've been through many real estate cycles as a developer, adviser, and investor and one big statistic that often gets ignored by analysts even in mature markets like the US is the percentage of buyers who are purely speculators. No reputable developer in their right mind should sell more than 25% of their current or future inventory to investors. The 2 primary forces behind the housing crash in the top 4 US markets are rampant speculation and oversupply; one feeding the other in a vicious and destructive cycle that's completely detached from real market forces. Nothing will weed out real market demand from predatory investment practices like a good Global recession. Dubai is growing up and its a good thing.

I am a little bit puzzled with the comment by the UBS. What are they expecting any way? Perhaps we should surranded the Gulf to them on a golden platter totally for free, 70%? It may as well be 100% in their predictions, so, what are they doing in the Gulf if they see no future in doing business there, aren’t bankers responsible for crushing the economy of the world, or they assumed we have totally forgotten about it, or have they missed some cash still laying there to pick up in term of insurance and reassurance or some other investments scamms.
Most bankers visiting the region now are philosophising their vision on the downturns and not offering any real solutions.
Investors has trusted their slogans and their sleazy talks and look what happens to the real estate markets in the regions? The questions know is: should we trust them and believe their stats on the economy and the future investments, or should we go ahead by trusting the visions that laid and paved the way by our fathers in the regions?