Will Dubai property prices ever reach European levels?

07/26/2006

A beautiful new apartment in the Dubai Marina can still be bought for around half what you would pay in a European city like Copenhagen. Yet Dubai residents think this an appalling price and many are waiting for a price correction. So are prices too high or too low by international standards?

This conundrum is faced by many potential buyers. And perhaps the main problem is not an immediate one of supply and demand but trying to get a vision of the future with Dubai as a very different sort of city.

The price of property in a city depends wholly on the income of its residents, and the supply available to satisfy that demand. Now supply and demand can be adjusted over time by the commercial decisions of developers and will always move towards an equilibrium situation.

More important is the actual spending power of a city's residents. If they are poor then landlords can not charge high rents if they want tenants. Similarly developers can not sell highly priced property to people who can not afford it, and potential landlords will not pay high prices for long if prospective tenants have little income.

Disposable income

Thus the real determinant of house prices in Dubai will be the prosperity of its citizens. Why are house prices so high in New York, London and Hong Kong? It is because these cities have concentrations of the highest earners in the world.

With its cluster-model of development Dubai is making a bold attempt to become a cluster of the highest earners in the Middle East. Whether that would be medical consultants in the Dubai Healthcare City or investment bankers in the Dubai International Financial Centre.

Dubai already has a wealthy media and IT community in the Tecom zone, and the Dubai Multi Commodities Centre is building up a trading hub for precious metals, diamonds, oil and even currencies.

Therefore house buyers who are looking to do more than turn a profit in a year or two should examine the future of Dubai. For if the future residents are going to have European style salaries, and tax-free too, then this will justify real estate prices at a far higher level than those seen today.

Location, location

In particular, the unique locations will be in short supply, and the very best property will sell at a premium far higher than that seen in the market now. And certainly over the next few years the flow of supply of property in the Dubai market should be an opportunity and not a threat to investors if they play their hand wisely.

For once Dubai has achieved critical mass it will be a highly competitive location for many businesses, regional and international, and property that is cheap now by comparison with Europe will be expensive and possibly more expensive than in Europe and perhaps more on a par with Hong Kong or Shanghai.