The World is Sinking

Just to add salt to the wounds of the Dubai government, I was surprised to read that The World islands are sinking into the sea. A case brought forward to the courts against the developers understand that the sand on the 300 islands are eroding!

The World islands were developed to be sold to millionaires with bespoke villas. However, all construction has stalled and it is not known when the plans will resume.

Property Crash!

In 2008, the global credit crunch had arrived. Dubai’s two largest mortgage companies, Tamweel and Amlak, stopped offering loans. Both accounted for more than half of all mortgages. Foreign investors started to leave and number of properties bought had nose-dived. Number of foreign ownership in 2010 had decreased by half when compared to 2008.

A weakness of Dubai's governement is its inability to control for its own monetary policy as its interest rates were pegged against the dollar so when the Federal Reserved decreased its rates, inflation in Dubai soared to 13%!

In 2009, Dubai World, a state owned real estate company behind the property expansion, announced to its creditors it had problem with its debt repayments. This news caused shockwaves which accelerated the decrease in prices.

Around 50% of real estate properties, summing up to £400bn, have been put on hold or cancelled.

Residents living on Palm Jumeriah, which is also home to celebrities such as Michael Schumacher and David Beckham, have seen their apartments or villas drop by 60% in a couple of months.

Investors struggling to meet their debt payments have been trying to sell their luxury cars. Under Dubai’s strict law, if one defaults on its debt or a cheque is bounced, they will be sentenced. Therefore any expatriate in financial trouble will most likely flee the country taking the next available flight home

The government has admitted it now has one of the highest levels of debt per capita in the world! 

A more detailed impact of the people of Dubai can be seen in this video link

Skyscapers Predict Crashes??

Having studied finance and economics for several years, I understand the theory behind the property collapse. However, I was not expecting to read that constructing the world’s tallest building can have severe consequences.

The Skyscraper Index, which was first introduced by an economist named Andrew Lawrence, stated that the construction of the world’s tallest building can offer an insight into the next financial crisis to come just around the corner. 

Dubai aka "Mushroom City"

In the UK, there is too much red tape and bureaucracy when it comes to planning permission. Sheikh Mohammed allowed buildings to go up and go up fast. Whatever he wanted, he got it done and done quickly. With cheap Indian workers this was made it possible.

Some impressive structures have been created such as the 400m indoor ski slope. While it may b -4°C indoor, it is usually 45°C outdoor. Another recognisable structure is The World which are man made islands designed to reflect the shape of the globe. Dubai is also home to the biggest shopping mall in the world which is situated beside the tallest building in the world called Burj Dubai. This is total embarrassment if we consider how the Millennium Bridge in London wobbled when it first opened to the public.

From 2002 to 2008, property prices increased 500% and became one of the fastest growing cities in the world hence Dubai is dubbed the “Mushroom City”. People were buying and selling properties on the same day. A fifth of the cranes in the world were operating in the city. Dubai had quickly became a popular destination for tourists who have been attracted by the sun. Investors had arrived by the ability to get rich quick.

The Property Boom

So how did the recent property boom began? How did Dubai change from becoming mainly covered in sand to many exciting, high rising structures?









Sheikh Zahed Road, the main road in Dubai in 1991













Sheikh Zahed Road, the main road in Dubai in 2005







There are two main reasons.

Firstly, the government continued to invest in real estate to ensure Dubai would become a commercial hub.

Secondly, investors could get access to credit very easily due to low interest rates worldwide.

It all began in May2002 when Sheikh Mohammed changed the law which allowed foreigners to own property in certain areas of the city. Before only Emirati nationals could own property. It could not rely its oil reserves, which only accounts for 6% of its income.  It needs to continue to attract foreigners by boosting its tourism sector and commercial activity. One way to achieve this is to follow the philosophy of “Build it and they will come”. 

Around the same time as the new legistslation was introduced, the Palm Jumeriah proposed plans were announced and all 4,000 off-plan properties were sold within 72 hours.

All 700 off-plan villas were sold out in a few hours when the prestigious residential property called “The Meadows” was released.

The change in the law opened up Dubai to the world and attracted huge amounts of foreign direct investment. To begin with new properties were relatively cheap selling on average £25,000 for a one bedroom accommodation. Investors saw great investment opportunities. Some investors made around 20% profit on their investment the next day. Property buyers were made up of around 85% of property investors in comparison to 15% in the UK.

Gareth Campbell (2012) describes the investors in the British Railway Mania were myopic but rational. Myopia is when people based their investment decisions on the short-term and are unable to predict what may happen in the long term. This behaviour applies to the property investors in Dubai as many off-plan properties were bought and sold several times before it was sold to the people who decided to live there . They were only concerned on how to make a quick profit. Believing prices would continue to rise, they would purchase more and more property in the belief they would sell to make a quick profit.

So where had these investors come from and where were they getting their money from? Majority of the investors came from abroad; only 28% of buyers were Arab nationals so there was a huge reliance on foreigners to make Dubai prosperous. In 2002, interest rates around the world were low. For example, in the US, the Federal Reserve deliberately kept interest rates low so credit could easily be accessed.

Allen and Gale (2000) explained that financial liberalisation can be a big factor in why asset prices such as the housing market may rise and fall sharply. When there is a credit expansion, investment and consumption increase so asset prices increase. When there is a credit squeeze, investments stop and asset prices come to a crash. I will show you later that even Dubai can’t avoid the property crash.