Is Dubai Real Estate a Bubble?

Dubai's real estate market indicates low bubble risk, with growing population, diversified economy, increasing spending power, and a low UBS Bubble Index score.

Are you interested to invest into the booming Dubai’s real estate market, but are unsure if this is just a bubble or a market which will provide sustainable growth with solid profits. In this article we will assess whether current trends indicate a possible bubble or sustainable growth. We will look into various elements affecting the market and present key insights for potential investors.

By the end of this article you should have new information to make your own opinion.

Do not hesitate to contact us, if you have any questions or feedback about this article.

Table of Contents

You might have noticed the remarkable boom in Dubai’s real estate market over the past few years.

While this boom is certainly real, the pressing question remains: is it a bubble or a sustainable trend?

Take a look at the graphic below, which summarizes the price trends per SQFT across Dubai from 2012 to 2024. On average, the price per square foot has doubled. While prime areas like Downtown and Dubai Marina have seen higher prices per square foot, Dubai is much more than only prime locations, with some regions priced significantly lower.

Overall, we observe a healthy trend over the years. But let’s get deeper into whether this bubble is real and compare those price trends with other significate data.

To understand whether the Dubai real estate market is a bubble or not requires us to look at various key factors.

Key Takeaways

  • Rising population boosts housing demand.
  • UAE GDP Growth signals stabilty.
  • Business expansion positively influences real estate.
  • UBS bubble index indicates lower bubble risk compared to other major cities.
  • Speculation and overbuilding pose potential risks.

What is a Real Estate bubble?

A real estate bubble, also known as a housing bubble, is a temporary market condition characterized by a rapid and unsustainable increase in housing prices fueled by demand, speculation, and exuberant spending. This phenomenon typically begins with a surge in demand amidst constrained supply, which is further fueled by speculators injecting capital into the market. However, when demand dwindles or plateaus while supply escalates, prices take a nosedive, leading to the eventual collapse of the bubble.

Most bubble come with some triggers, which can be seen before the bubble bursts.:

  • Low Interest Rates: Prolonged periods of low interest rates can stimulate demand and fuel speculation.
  • Loose Lending Standards: Easy credit access and lax lending criteria can lead to a surge in demand and prices.
  • Speculation and Emotional Buying: Fear of missing out (FOMO) and speculative buying can drive prices higher.
  • Economic Downturns: Economic downturns, interest rate hikes, or other external shocks can trigger a housing bubble’s collapse
  • Oversupply: When demand decreases or supply increases, prices drop, leading to a correction in the market

Keep reading, and we will get into those points to give you a feeling of where we are and what you can expect.

Dubai’s Growing Population

Population data from the Dubai Statistics Center shows that the population grew from 3,550,186 on 31.12.2022 to 3,654,722 on 31.12.2023. This represents an increase of 104,536 people in just one year.

The graphic below shows the growth trend of Dubai’s population since 2014 to July 2024. Each data point represents the population as of December 31st of each year.

Dubai Population Growth 2014-2024, Data from Dubai Statistics Center. Diagram Dubai Population
Dubai Population Growth 2014-2024, Source: Dubai Statistics Center

As of July 2024, the population stands at 3,742,425, indicating a continued upward trend in population growth. This consistent rise in population significantly impacts the demand for real estate in Dubai.

The relationship between population growth and demand for residential properties is a significant factor in shaping the real estate market. Here’s a closer look on the relationship between Real Estate and growing population:

Demand for Housing: As the population grows, so does the demand for housing. This demand extends beyond apartments to include other types of residential properties such as villas and townhouses.

Imbalance on Supply and Demand: With increased demand for residential properties, there’s a risk of supply not keeping pace. If housing supply falls behind growing demand, it can create an imbalance in the market, further driving up prices. This scenario underscores the importance of balanced development to maintain market stability.

Dubai’s Key to Stability: Expansion and Diversification

This growth in population aligns with economic growth, which is showing a diversification in Dubai’s economy, reducing reliance on oil and bolstering real estate stability. In Our Article UAE GDP 2023/2024 we took already a closer look into the diverse economy of Dubai and the UAE.

UAE real Gross Domestic Growth since 1990
UAE real Gross Domestic Growth since 1990

As shown in the graphic above, the GDP of the UAE has a promising outlook. But how does GDP correlate with property and rent prices?

Correlation between GDP and Real Estate Prices: For residential real estate, GDP growth and real estate capital returns are linked because income, which is needed to buy homes, is derived from GDP. Studies show median home prices correlate with GDP per capita by 60% to 95%. Long-term growth trends of both cycles often align.

Business expansion and independence from oil

Many people see Dubai only as a city benefiting from the oil business. However, a closer look at economic growth figures reveals that Dubai has strong growth in other industries as well. These industries attract highly skilled professionals, strengthening Dubai as an international business hub for trade, finance, logistics, and technology. These professionals drive GDP per capita growth, increasing the overall buying power of UAE and Dubai residents. For property investors, this can signal the start of a long, symbiotic relationship with increasing spending power, leading to attractive rental returns and a stable, growing real estate market.

GDP infographic 2023 by Dubai Goverment, Mediaoffice.ae
Source: https://mediaoffice.ae/en/news/2024/January/21-01/Dubai-Economic

Get regular updates about the Dubai Market and Trends

Dubai – UBS bubble index 

If you never heard of the UBS bubble index, let’s start with a short introduction, to clarify the question What is the UBS bubble index:

The UBS Bubble Index is a tool used to assess the risk of a housing bubble in global cities. Developed by UBS, a Swiss multinational investment bank, the index evaluates property markets to determine if they are overvalued and at risk of a sudden price correction.

Reading the UBS Bubble Index is straightforward. UBS uses a simple scoring system, allowing for a quick assessment of whether a city is at a higher risk of a housing bubble.

UBS Scoring System

Each city is given a score on the index, with higher scores indicating a greater risk of a bubble. A score above 1.5 suggests bubble risk, while a score between 0.5 and 1.5 indicates overvaluation. Scores below 0.5 suggest fair value or undervaluation.

UBS Bubble Index 2023: Source: UBS
UBS Bubble Index 2023: Source: UBS

Interest Rates and Cheap Money for Home Buyers in Dubai

An indicator of a real estate bubble is often cheap money, characterized by low interest rates and loose lending standards by banks. Currently, interest rates for home financing in Dubai hover around 5%, which is considerably higher than countries like Germany, where rates are between 2.5% and 3%. Additionally, lending standards in Dubai are more stringent; residents must provide a 20% down payment for their first property and 40% for subsequent ones. Non-residents face even higher down payment requirements, up to 50%, along with different interest rates. In contrast, countries like Germany allow for 100% financing or more. Thus, the current interest rates in Dubai do not indicate a bubble.

For more detailed information about financing options, visit our mortgage calculator.

Is Dubai a Real Estate Bubble or Not?

Considering various factors, we conclude that Dubai is not currently at risk of a real estate bubble.

Firstly, the growing population significantly boosts demand for residential properties. Dubai’s effective pandemic management has led to a steady increase in residents, driving housing demand.

Secondly, Dubai’s economic growth and GDP expansion are noteworthy. The city’s diversification beyond the oil industry builds a robust economic foundation. Sectors such as trade, finance, logistics, and technology attract highly skilled professionals, further strengthening the economy.

With a growing economy and an influx of high-skilled professionals, the spending power per resident increases. This rise in purchasing power leads to attractive rental yields and profit gains for property owners.

Despite the higher interest rates and stricter lending standards in Dubai compared to countries such as Germany, where financing is more relaxed, current conditions do not indicate a real estate bubble. With interest rates around 5% and significant down payment requirements, the market is stable and sustainable.

Lastly, the UBS Bubble Index score of 0.14 for Dubai indicates no significant bubble risk. This score reflects a stable and balanced real estate market.

At NST Real Estate, we do not see a bubble risk in Dubai for 2024 or the coming years. The plans to grow Dubai and the UAE are promising, and Dubai has the capability to become one of the world’s most important global hubs with a flourishing real estate market.

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