Many sectors in China have been deeply affected by the recent slowdown in economic activity. The Chinese real estate sector, which has shown clear signs of cooling in recent months, is one of the sectors expected to experience a more severe economic downturn. Price growth, which peaked late last year at an annual rate of 9.9%, has been trending downward since then. Furthermore, the month-over-month growth rate has been negative since May, with monthly declines reaching approximately 1%.
Prices of existing homes had the greatest impact on moderating real estate prices, failing to rise in 19 of China’s 70 major cities.
For their part, Chinese authorities have attempted to correct inflated real estate prices while simultaneously meeting the high demand resulting from urbanization. The various inconsistent measures implemented by the government—such as capital gains taxes, ownership restrictions for residents, and rising mortgage rates—all had a significant impact on the market. Additionally, new construction projects built at affordable prices have further contributed to downward pressure on real estate prices, while still meeting the high demand. The Chinese government’s success in reining in the real estate market, coupled with an increase in the supply of affordable housing projects, suggests that housing inflation may remain low in the medium term.
In Dubai, the real estate market is going through a different phase. The global financial crisis had a significant impact on Dubai’s housing market, causing a sharp price correction that lasted for three years. In early 2012, real estate prices began to show an accelerating rate of growth. Among other factors contributing to the emirate’s accelerating economic growth and rising housing prices are large capital inflows seeking refuge from the turmoil in the region. If the pace of construction is taken as a barometer of the real estate market, there appear to be no signs of a slowdown in activity. The number of residential units built in Dubai is expected to grow at an annual rate of 6.6% this year, according to forecasts by the global real estate consulting firm Jones Lang LaSalle, compared to an annual growth rate of 3% over the past two years. The office and retail segments have also seen significant increases in prices and occupancy rates; according to figures released by Jones Lang LaSalle, vacancy rates have declined despite an increase in supply. Dubai’s real estate market is currently experiencing expansion across all property segments.
Historical indicators suggest that Dubai’s real estate market is vulnerable to the risks of overheating. Memories of the previous bubble, which burst in 2008, remain vivid to this day, and rising prices are currently higher than pre-crisis levels. Macroeconomic factors suggest that prices in Dubai are set to rise further; however, it is unclear to what extent the current rate of price growth will be sustainable. In an effort to ease inflationary pressures, policymakers in the country have introduced measures such as a tax on real estate transactions equal to 4% of the property’s value. Although the tax rate is lower than those in Hong Kong and Singapore—economies that have experienced overheated real estate markets—the mere implementation of this measure demonstrates that authorities are aware of potential risks and are prepared to intervene proactively.
Furthermore, the real estate markets in China and Dubai share pressures on demand that are expected to persist. However, the outlook for the two markets appears fundamentally different. While China’s policies have proven effective, the impact of Dubai’s recently introduced policies remains unclear, and the characteristics of Dubai’s economy suggest that curbing inflation will be a challenge.
