Julian Roche, Chief Economist, Cavendish Maxwell
A market in perspective
Economists are a sober lot, generally. Facts alone do not satisfy us. At a macro-economic level, our interests lie predominantly in the relationships between economic indicators, market performance and policy-based decision-making. We are generally wary of speculation, preferring to base our analysis on the links between economic data wherever possible. Identifying the reasons behind the performance of the Dubai real estate market is a particular case in point.
The current downward trend is clear enough: As an example, Cavendish Maxwell reports that the average trading price for villas/townhouses in Dubai moved from AED2.3 million at the end of 2017 to AED1.8 million in the last quarter of 2018. Rental falls of around 7.9% provided evidence of a concomitant yield compression. Oversupply has been the uniformly blamed culprit, with political tension and the resultant effects on local stock markets in the Gulf region – Dubai down by a quarter over the year – running a close second. This has also been an approach taken by academics in studying real estate markets in Asia,. Short term, that is a plausible explanatory narrative. But is that really the end of the story?
What really matters
The long-term correlation between economic fundamentals and the performance of the real estate sector as a whole, at sub-sovereign level, is well established. Oil prices, which may be the most obvious commodity driving Dubai’s real estate prices, turn out to be poorly correlated with any segment of the market: World Bank figures showed a 12% fall in average crude oil spot prices from December 2017 to December 2018, but a 16% rise from December 2016 to December 2017, without any comparable positive effect on the Dubai real estate market. This is proof, if it were needed, that the international oil market has now finally become quite separated from Dubai’s real estate market. Cold comfort for investors, perhaps, unless they were arbitraging between oil and real estate, but an undoubted source of satisfaction for policymakers seeking, and now achieving, economic diversification. The declining contribution of real estate, construction in particular, to the emirate’s economy provides further evidence. Officially, this was around 7% in 2017 compared to well over 20% at the time of the bubble, and even if these figures are underestimates, few would quibble that the overall trend is downward.
Shorter-term demand and supply imbalances may dominate the headlines, but the evidence from regression models is that now, along with other mature markets, Gross Domestic Product (GDP), Foreign Direct Investment (FDI), and above all, demographics drive the Dubai market. Though statistics vary slightly, according to the Dubai Economic Department, the emirate’s GDP is estimated to have grown by 2.8% in 2017, but deductions from year-end Purchasing Managers’ Index (PMI) data suggest a broadly similar outcome, with economic growth still continuing, albeit at a muted pace.
The one-off effects of the introduction of VAT have probably already been factored into corporate decision-making, contributing to these results. Improved lending conditions with the removal of the 20% lending cap as part of the promulgation of the new banking law in November 2018 have not had time to impact on prices. As for demographics, the resident population of Dubai was 2.98 million in 2017 – the latest year for which official statistics are available – compared to 2.1 million in 2012. But evidence for 2018 from the Dubai Media Centre suggests that the population at the end of Q3 2018 reached 3.14 million and is still growing. Population growth overall is therefore steady. Further geographic, gender and income/wealth deconstruction of the population data will no doubt help with understanding sub-market dynamics, and perhaps even cloud any optimism derived from the top-level number, but it remains significant for the market as a whole. GDP per capita, which has been used as an independent variable to test for bubble conditions in a real estate market, fell by 7% in 2017, but held steady in 2018, both times measured in nominal terms, as with real estate prices. Whatever else is now happening to the Dubai population, it has stopped getting poorer. In the opposite direction, however, United Nations Conference on Trade and Development (UNCTAD) reported that net FDI flows were negative at -$3.6 billion in 2017, albeit representing a considerable improvement over 2016. The Dubai government’s estimates for H1 2018 showed a significant 26% rise.
Finally, the US dollar, in which Dubai real estate prices are reported, though not necessarily measured by all investors, stood at a Trade Weighted Index (TWI) value of 91.8 at the end of 2018, compared to 87.5 a year before. Taking these indicators together, they provide a good, though far from perfect, correlation with the performance of the Dubai market in 2018. And, most importantly, serve as better indicators than the supply delivery data that Cavendish Maxwell also provide, which are a reliable gauge of short-term sentiment. If oversupply and political crisis were the dominant factors in the Dubai market long term, to put it bluntly, the market would be in far worse condition than it is now.
Welcome to the new normal
Regression analysis of this kind does enable a second important deduction: the Dubai market is very definitely not in a bubble. A bubble has been usefully defined as ‘a sharp rise in price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers – generally speculators interested in profits from trading in the asset rather than its use of earning capacity’. Specifically, in relation to real estate, it has been argued that the development of a bubble requires an impulsive buyer and a shallow market which cannot absorb temporary supply shocks. Unsurprisingly, a bubble is usually followed by a crash. All this meets general acceptance, and the Dubai market during, and immediately after, the global financial crisis fitted this conception very accurately. More recently however, popular commentary frequently extends the term to any market in which there is widespread expectation of a sudden price fall, even if the market is currently drifting downwards, and even if, as the evidence above demonstrates, the market is trading below economic fundamentals. There are severe difficulties in measuring according to either of these definitions, but no one is suggesting that Dubai market participants are now mostly speculators.
Conclusion: a mature market driven by fundamentals
There really is therefore no sober economic justification for regarding what happened last year as proof that the Dubai market is still in a bubble, in either the economic or the popular use of the term. Rather, the year has shown precisely where to look for the cause of price trends in what is now a mature market: Economic fundamentals. None of this is to suggest any kind of dramatic recovery in the market during 2019, it should be noted. Analysis of the economic impact of the political, global market and commodity changes driving the market this year will be the subject of next month’s commentary.
 Cavendish Maxwell (2019) 2018 Dubai Market Report: A Year in Review. Dubai, Cavendish Maxwell.
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 Liu, F., Liu, D., Malekian, R., L,i Z., and Wang, D. (2017) A measurement model for real estate bubble size based on the panel data analysis: An empirical case study. PLoS ONE 12(3): e0173287. doi:10.1371/journal.pone.0173287.
 Reaynaud, B. (2012) Real Estate Bubble and Financial Crisis in Dubai:: Dynamics and Policy Responses. Journal of Real Estate Literature 20(1), 51-78, p.53.
Published by: American Real Estate Society
 Kindleberger C.P. (1991) Bubbles. In: Eatwell J., Milgate M., and Newman P., (eds.) The New Palgrave: the world of economics. London, Macmillan, 20-22, p.20.