The authorities have responded to this risk by raising the property registration fee from 2 per cent to 4 per cent, and developers have put their own restrictions on “flipping”. Whether this is effective in substantially reducing the practice remains to be seen.
There are two outcomes to rising speculation. The first is that real estate prices will rise beyond what is justified by fundamentals, resulting in a correction further down the line. The second outcome is that supply once again responds to the inflated demand, resulting in a renewed construction drive that increases the price interlinkages with the real economy.
New construction drive
In the past 18 months there have been a number of announcements regarding new projects, many have been revived after they were put on hold in 2009. Current growth rates would justify new supply in the residential market equivalent to around 25,000 units a year, on average. Indications in the retail and hospitality markets are also supportive of moderate construction growth in these sectors. However, the risk is that the surge in demand and prices could once again lead to exuberance in supply, which could have two detrimental effects on the emirate’s economic outlook.
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