Dubai's first foreclosure auctions should provide a dose of reality in a market that still suffers from boom pricing, as owners have proven reluctant to accept that 2008 prices won't be back and clung cling to the hope offered by reports of recovery.
Analyses of Dubai's residential property market, however, offer mixed perspectives on recovery. The indications are that finished properties in desirable locations such as Jumeirah Beach Residence and the Palm Jumeirah have seen modest gains. But an analysis in May by Bank of America Merrill Lynch predicted an excess of 44,000 properties across the whole market, which it claimed would cause prices to fall a further 15 per cent on average.
Ultimately these assessments all face the same uncertainty that plagued attempts to understand the market during the boom: accurate measurement of the factors driving prices is still overwhelmed by scarcity of meaningful and relevant data. Dubai's problem is not unique. Finding sound data in emerging markets is problematic throughout the globe. Without centralised and regularly updated statistical databases maintained either by government or industry associations, analysts essentially have to fill in the blanks with a combination of primary research and justified assumptions.
But understanding Dubai's residential property is complicated by a broader combination of problems. Examining the existing and upcoming residential stock in the market's rapid ascent tended to be a labour-intensive exercise. Numerous phone calls to developers would often yield little useful information about the number, type and expected completion date of projects. Even the leading developers were unwilling, too busy or simply unable to share key information about their projects.
Moreover, the volume of projects being announced and the rapid changes in price meant maintaining accurate, up-to-date models was an impossible task. Assessing demand was even more problematic. It is usually calculated as a product of the population and average household size, which determines the quantity of housing required by residents. In Dubai's case, double-digit population growth meant demand exceeded the supply of existing units, driving a rapid increase in rental rates and leading some newcomers to cohabit as a way to find an affordable place to stay.
The key to the wealth being created in the market at the time, however, was not in renting to the growing population but in off-plan sales and the fundamental question underlying demand had to be "Who were the buyers?". Efforts to understand the sustainability of the market had to focus on who was buying, their motivations for entering the market and whether there would ultimately be demand for the property among the end-users, that is residents, once all the off-plan projects were delivered.
The surging population growth alone could not explain the demand for residential sales. Some buyers sought second homes or holiday properties, but at the time many analysts pointed to the role of speculative investors in driving demand for off-plan purchases. This was perhaps the least understood factor in the market and the trickiest to quantify. As well as expatriates living in the UAE that sought to use their tax-free salaries to take advantage of soaring prices, non-residents from places such as Russia, Iran, India, Europe, central Asia and all around the Middle East all sought a profitable place to park liquidity.
It is still unclear what proportion of demand came from such buyers. While primary research, estimates and assumptions could patch over the difficulties in assessing the resident population's housing needs and wants, it was nearly impossible to determine how many external buyers were active in Dubai, let alone what type of unit they sought to buy and why, and how many they owned or could afford. Price increases reached frenetic levels when properties were changing hands multiple times in a matter of months, as speculators sought to cash in their returns and reinvest.
Few believed this was sustainable as it reached its height. The prices were far beyond the budgets of most Dubai residents and unless the emirate could create an economy that supported a disproportionate number of high-income households, there would ultimately be no demand for property that cost so much. The most telling indicator of the role speculators had played was when they left. As the market slowed speculative demand not only dried up, but attempts to liquidate property portfolios began to drive prices lower, adding to the downward pressure.
The role of speculators has brought about caution for the future. Sheikh Ahmed bin Saeed Al Maktoum, the chief of the Dubai Supreme Fiscal Committee, has said "speculators are no longer welcomed". If this is the future of the market, then demand has to come from end-users looking for a residence in Dubai or seeking a rental or holiday property. As analysts now try to understand the forces influencing prices, they need to quantify not just the scale of any potential demand, but the content of this demand as well as preferences for the type and size of units demanded.
There is also the question of affordability among buyers: what is the income distribution of Dubai's population and what kind of property can they afford? The high proportion of luxury properties in the market coupled with the fact that owners have been reluctant to sell as they hold out for recovery has maintained prices beyond the budget of many. Despite the price correction seen so far, there is still a fundamental disconnect between the type of property being sold and what the majority of Dubai's population can afford. Prices for these properties have to fall further if sustained demand from Dubai's resident population is to emerge.
Foreclosure auctions should provide a sense of market prices that statistical analysis of supply and demand has not. Banks unloading these assets will no doubt face losses in the short term. But as the process brings prices within the budget of a greater proportion of the population, the demand for mortgages will increase alongside demand for property. This will see the market move towards a sustainable future based on realistic prices in line with the income distribution of the city's population. Hopefully it will also be easier to measure accurately.
Henry Collis is a Dubai-based freelance economic analyst