Dubai, the emirate that suffered one of the world’s worst property crashes in 2008, doubled property-sale fees in a bid to limit speculation and avert another housing bubble.
The Dubai Land Department will raise the transaction fee to 4 percent from 2 percent effective Oct. 6, Director General Sultan Bin Mejren said at a press conference today. The change will apply to residential and commercial properties, including those sold before they are built, he said. It won’t be retroactive and won’t affect industrial real estate.
“This decision will limit quick property speculation, which is harmful to the market,” Bin Mejren said. “The market is recovering and we want to help boost stability and sustainability.”
Dubai home prices increased 21.7 percent in the second quarter, the fastest pace in the world, raising concerns that a second bubble is in the making, a survey by broker Knight Frank LLP showed. The market’s revival has prompted a return of advance sales, known as off-plan transactions, that fueled speculation before the market collapsed and caused prices to drop by as much as 65 percent.
The increase “may negatively impact property sentiment and demand for the next three to six months,” said Digvijay Singh, an analyst at VTB Capital Plc. However, “it’s the prudent thing to do because the more stable Dubai’s fiscal situation is, the better the long-term prospects for property values.”
Dubai will introduce further regulations in the next few months, Bin Mejren said. The government this week established a center to settle rental disputes to replace an existing committee. The center will have the capacity to review 250 cases a week, up from the current capacity of 100 cases, the Land Department director said.
The average price of a mid-range villa has soared 34 percent this year to 1,275 dirhams ($347) a square foot, the highest since October 2008 when property prices began to fall, according to Cluttons LLC data on Bloomberg. The value of real estate transactions rose to 162 billion dirhams this year, from 90 billion dirhams a year earlier, Bin Mejren said.
Even after the fee increase, investors in Dubai will still pay a comparatively low property tax, Bin Mejren said. Property-sales tax in the U.K. ranges from 4 percent to 15 percent, while people pay 6 percent in France and 5.8 percent in Japan, he said.
The higher fee will probably have little effect on the rate at which home prices are growing, Knight Frank said in a note today. Purchases will still be relatively inexpensive by global standards after the increase, the broker said.
The higher fees will generate additional revenue for the government, which doesn’t impose an income tax. Dubai’s government debt is estimated at $25.6 billion, according to data compiled by Bloomberg.
Dubai’s economy grew the most in five years in 2012, expanding 4.4 percent compared with 3.6 percent the previous year. The emirate’s consumer price index rose 1.7 percent in August from the same period last year, the biggest jump since December 2009, data compiled by Bloomberg showed.
“The additional property fees are a first step, but they are not enough on their own,” said Simon Williams, the Dubai-based chief Middle East economist at HSBC Holdings Plc. “I’m looking to see what other measures Dubai and the U.A.E. will take to guard against a repeat of the boom-and-bust cycle.”
Developers including Emaar Properties PJSC, builder of the world’s tallest tower, and Damac Properties Co. have started selling off-plan properties as the economic turnaround sparks new projects. Nakheel PJSC, which built three palm-shaped islands off Dubai’s coast, said today it will start selling 1,200 homes to be built in its International City development.
The recovering real estate market prompted the United Arab Emirates Central Bank to propose caps on the size of mortgage loans relative to the value of the property. Lenders and the Central Bank are currently in talks over limits.
The Land Department also said court fees will be waived for buyers in stalled projects that will be liquidated, Bin Mejren said. The fees amount to about 30,000 dirhams per property, he said.