Talk of a Bubble Grows in Dubai

---

Reports of Dubai home prices jumping more than 30 percent in the last year are raising concerns that a bubble is forming in the property market.

The growth in residential prices is "indeed unsustainable," Jones Lang LaSalle argues in a new report. The firm predicts prices will continue to rise for the next 12 months, but the "rate of increase will decline somewhat."

"An extended period of slower and more subdued growth would be far more beneficial to the overall market than a continuation of the current rates of increase, followed by a severe correction," JLL says in the report.

Home prices are were up 17.9 percent in August from a year earlier, according to REIDIN, which tracks Dubai Land Department data. But prices increased more than 30 percent in some projects.

Some firms report that prices are rising faster than the rates suggested by the Land Department data. Apartment prices were up 42 percent in the third quarter compared to a year earlier, property firm Asteco reported this week.

But this boom period is different than the pre-crash run-up. Increases are based on fundamentals of an improving economy, JLL argues.

However, prices are growing at a much faster rate than the economy, suggesting "speculative activity" is impacting the market.

"It is our view that, while there are some worrying signs of overheating creeping into the market, conditions are sufficiently different this time around that another bubble can be avoided," JLL reports.

Villa prices were rising at 80 to 90 percent a year in 2007, making the current pace appear more reasonable. A new rush of supply entering the marketing should also dampen price increases, JLL says.

But there are clear landmines in the future. More than 45,000 residential units are scheduled to complete by 2015. About 80 percent of purchases recorded with the Dubai Land Department in the first half of 2013 were are all-cash, suggesting that investors were playing a large role. And recent history illustrates how "speculative money can withdraw from the market very quickly," JLL says.

But the market should be more resilient than in 2008, with less emphasis on pre-sales and stronger funding, JLL say.

The firm concludes that there is no bubble on the horizon. Prices will continue to rise for the next year, JLL says, unless there is an unpredictable "black swan" event to crash the market.