00:00Dubai's real estate market is showing an elevated risk of hitting a bubble. That's according to UBS.
00:05The bank's latest global bubble real estate index saw Dubai record the strongest risk increase from last year, together with Madrid.
00:12Joining us now is economist Matias Halsey. He was the lead author of the study at UBS Global Wealth Management's chief investment officer.
00:19Good to have you with us. I'm just going to start off with a very simple question.
00:22How do you define a bubble? Does it just mean not sustainable, unsustainably high prices?
00:27Well, good morning and thanks for having me.
00:32Well, I mean, with our analysis, we try to basically quantify, let's say, the risk of a housing bubble.
00:37And a bubble, as we see, is basically just a mispricing of an asset.
00:43In terms of housing markets, that means that house prices are sort of decoupled, let's say, from their fundamental value.
00:50So if you are, let's say, at high bubble risk, then you would say there is a lot of downside potential and investors should not expect inflated, just at capital gains in the longer term.
01:05Yeah. OK, so let's go back to your report then.
01:09Miami shows the highest bubble risk amongst the cities in your study.
01:13High bubble risk also appears in Tokyo and Zurich.
01:15But Dubai has shown the highest risk increase on what basis?
01:22Well, I mean, Dubai has been a very special market in our selection.
01:27I mean, we run this analysis for more than 20 cities globally.
01:31It was always the same method.
01:33It's always a bit of top.
01:33It's always a top down approach.
01:35Maybe that's also something which I need to mention.
01:37Now, I mean, Dubai has I mean, the market has broken all kind of records in the past five years.
01:42OK, you recorded, I believe, the strongest price growth for the last five years, strongest rental growth in the past five years, strongest income growth in the past five years.
01:52And so that's all.
01:53And that's also the reason why you're not at high bubble risk at the moment.
01:58But lately, I mean, lately, home prices have started to outpace rents.
02:04You know, you now record the third year in a row with double digit price growth.
02:09And that is typically a breeding ground for speculation.
02:14So more and more investors are buying property for speculation purposes.
02:19Then we also see now a pickup in leverage.
02:23It's still low, but it is increasing again, I would say.
02:26And then we also have construction of the building permit on our reaching and new highs and also the size of the construction industry in Dubai.
02:36OK, it's basically expanding compared to the rest of the economy.
02:39And that's also historically always been a risk sign.
02:43And the last point to make is affordability.
02:47OK, one more thing.
02:49And I mean, Dubai, of course, the highest rent to income ratio of all cities in the study.
02:54OK, so last week, the Saudi Arabian Crown Prince Rahman bin Salman announced measures to freeze rents in Riyadh for the next five years.
03:07What do you make of that announcement?
03:08And do you think that authorities in Dubai could consider something similar if rents and all of these other metrics keep rising?
03:18No, you do not.
03:19I mean, that's the rate of disaster, basically, if you start to tackle, start to manipulate rents directly.
03:29I mean, what you can do if you want to manage the market, I think then you should maybe have a look at, I mean, there are many examples in our city sample.
03:38One, if you want to manage it tightly, you have to refer to, you should do as Singapore does, you should start taxing, basically, speculation.
03:47You should start to increase maybe, it can be lump sum taxes, it can be vacant home taxes, it can be taxes on Airbnb.
03:56There are all kinds of sort of measures which have a limited impact but still may slow down a bit, slow down rental growth.
04:03But, I mean, especially in the case of Dubai, I mean, it's the strategy, okay, it's the strategy is to grow and that's also driving up rents.
04:11I mean, yeah, I mean, at some point you have to ask what you want.
04:14Okay, just a final quick question for you, to bring it back to Dubai, the price per square foot is still of value compared to other major metropolitan cities around the world.
04:29Is that one of the metrics that you're looking at to determine whether actual real estate is overheating?
04:33No, that's not something we care about because the absolute price level is given by supply, by building costs, by land value in the end, so that's not that important.
04:48But it's one reason why we think that risk reward in Dubai is still okay.
04:51I mean, just because there's an increase in bubble risk, the bubble risk itself is not yet where we had other cities in the past.
04:59So if you look at very high yields and you have a price level, which is still rather moderate compared to New York.
05:07I mean, a high or a third is high.
05:09So, I mean, that makes you still look at that.
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