Keep calm. There's no bubble”, proclaimed a giant poster on a 40-storey building overlooking a Dubai highway, advertising a property finding portal late last year. That may have been true at the time, but the risks are rising.
A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real estate projects in the last few months, after cutting back sharply in the wake of Dubai's 2008 crash.
At the same time, property prices have been soaring on the back of Dubai's economic boom, increasing the chance of the market rising to unsustainable levels.
Surging supply and unsustainable demand are a risky mix — the same combination that got Dubai into trouble six years ago, forcing state firms to reschedule tens of billions of dollars of debt and jolting financial markets around the world.
This time, authorities say they are aware of the dangers, and they have taken regulatory steps to slow demand growth. But the steps are still modest compared to those by other global cities facing the same problem, such as Hong Kong and Singapore.
“It's too early to be calling top, but credit growth of that pace tells you that the cycle is accelerating rapidly,” said Simon Williams, HSBC's chief economist for the region.
“Such a huge increase in lending is simply not consistent with economic order and stable asset prices. The time for policy action is now, before bubbles really get going, not when they are already in place.”
Dubai house prices posted the fastest year-on-year rise of any of the world's major markets in January-March for the fourth straight quarter, soaring 27.7%, consultants Knight Frank said. Rents rose about 30% on average in the same period.
The value of real estate deals in Dubai, with a population of 2.3 million, jumped 38% in the first quarter to some 61 billion dirhams ($16.6 billion), the Land Department said.
There are good reasons for property prices to rise, including annual economic growth around 5% and inflows of money from Arab investors seeking safety in a turbulent region.
While some prices have almost returned to their pre-crash peaks, they are well below some other global business cities. Prime real estate in Dubai costs between $6,200 and $7,500 per square metre ($580-700 per square foot), against $27,600-33,700 in Singapore, according to Knight Frank.
The volume of real estate deals has not reached its pre-crash peak but demand is showing signs of slowing.