UAE Central Bank warns of Dubai property market bubble

Low residential rental yields in Dubai and Abu Dhabi may indicate growing imbalances and overheating in the real estate sector, the United Arab Emirates Central Bank said on Sunday, in the first official warning about soaring property prices.

House prices in Dubai, which nearly defaulted on its debt in 2009 after a property bubble burst, soared 27.7 percent from a year ago in January-March, leading the global rankings for a fourth straight quarter, according to consultancy Knight Frank. In some areas, prices are back near pre-crisis levels.

In an annual financial stability report, the central bank said there was no build-up of vulnerabilities in the banking system, and it did not indicate that it planned to take any concrete action towards the real estate market.

With U.S. interest rates still ultra-low, any rate hike in the UAE still looks very unlikely, especially given the UAE dirham’s peg to the U.S. dollar.  But the central bank’s warning was striking because authorities in the UAE almost never discuss economic risks in public, preferring to insist that the outlook is rosy.

“Current average rental yields in Dubai and Abu Dhabi are approximately 70 and 130 basis points below historical averages, which could indicate growing imbalances – (an) overheating real estate market,” the central bank said. “Monitoring developments in the UAE real estate markets and the banks’ exposure to it remains a core financial stability priority,” it added.

Last month, the International Monetary Fund warned that Dubai, whose government and state-linked companies need to repay over $50 billion of debt by 2016, might need stronger tools to rein in real estate speculation.

The central bank said it planned to introduce new rules on liquidity and begin consulting with banks on a new capital regime in line with the Basel III framework in the second half of 2014. Basel III global banking standards will be introduced around the world over the next several years.

Dubai skyline