“It’s very hard to spot bubbles until they burst,” Masood Ahmed, head of the IMF’s Middle East and Central Asia Department, said in an interview in the Gulf Arab emirate. “There is evidence that prices of real estate have been rising at a very rapid pace over the past 18 months.”
Dubai’s recovery from the verge of default in 2009 has fueled 35 percent-increase in real estate prices last year, according to broker Knight Frank LLP. That has sparked concerns that the emirate is at risk of repeating the 2008 property crash. Dubai’s benchmark DFM General Index (DFMGI) for stocks has jumped 59 percent this year, the biggest increase among more than 90 measures tracked by Bloomberg globally.
The IMF comments came as HSBC Holdings Plc said its U.A.E. Purchasing Managers Index rose to 58 in April, the highest level in at least five years. The U.A.E. needs to “ensure that the excesses of the last cycle are avoided,” Dubai-based economist Simon Williams wrote in a report released today.
The PMI data show “that inflationary pressures continue to build as wages rise and spare capacity is taken up,” Williams wrote. Inflation may accelerate to 5 percent this year in Dubai while asset prices will continue to gain, he said. Inflation stood at 2.2 percent in December.
Mohamed Lahouel, chief economist of Dubai’s Department of Economic Development, told a joint news conference with the IMF official that property prices “are becoming unrealistic.”
“What worries me is that human greed is driving this,” he said. “It’s important for Dubai to worry about the impact of speculative demand for real estate, and not aim for the maximum GDP growth rate.”
Sultan Bin Mejren, the head of Dubai’s Land Department, said in January that the emirate plans to issue rules to control speculation on properties sold before they’re built.
Emaar Properties PJSC (EMAAR), Dubai’s biggest developer, banned the resale of incomplete properties before 40 percent of the value is paid. The U.A.E. central bank also imposed restrictions on the value of mortgages made available to foreign buyers.
While the IMF welcomes the measures “we think it’s time to consider what additional actions could be taken to slow down the increase in demand that could be speculative,” Ahmed said without elaborating.
Not everybody shares the same view. The Institute of International Finance, a Washington-based financial industry association, said yesterday that the rise in U.A.E. property values probably won’t lead to an asset-price bubble because credit growth remains relatively modest.
Loan growth may slow to 11 percent in 2014 from 13 percent last year, the IIF said in a report, while non-oil economic growth may accelerate to 5.2 percent from 4.9 percent.
The IMF will probably raise its estimate for economic growth in the U.A.E. this year from the current level of 4.4 percent, Ahmed said. Dubai’s economic growth forecast of 5.1 percent will also likely be revised upward, he said.
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