If you build it they will come

Winterspeak asks:

The primary complaint seems to be that rents in Dubai are too high -- which is not unusual. What is unusual is the top demand -- to force property owners to prove occupancy within 12 months of ownership/property completion. Essentially, this argues that owners are keeping their properties empty to drive rents higher. This may be possible if Dubai property ownership was a monopoly, where the owner could restrict supply to increase price (and therefore overall profit) but I think it is quite impossible these days to have the words "Dubai" and "restrict supply" in the same sentence -- the entire city is one enormous construction site.

Does anyone know why rents in Dubai are going up so fast during a period of massive residential construction?

At a guess, the answer is that doubling oil prices have pushed up many incomes in the businesses that cater to the oil industry, which in Dubai is nearly all of them, so that even skyrocketing supply is not keeping up with demand. I'd also expect that the flow of oil money has encouraged people in other parts of the Middle East to seek apartments in Dubai (as well as New York and London and Paris, which is one of the reasons real estate markets are so robust in those cities). This may be why, earlier in his post, he cites a renter's group demanding that landlords prove their apartments are occupied--if I were a middle income renter priced out of the market, I'd be kind of irked at absentee tenants maintaining pieds-a-terre.

All this will undoubtedly iron itself out eventually, one assumes, since as Winterspeak points ou Dubai is basically one massive construction site. But the temporary dislocations can still be painful when you've been dislocated from your house.

Comments

I'm sure the Libertarian streak is just uncomfortable as heck with any kind of government-forced attempt at usurping personal ownership 'rights.' Heck, go take a look at a great number of places all over, and you'll find the same thing.

In Vegas the estimate is that there are about 20-25% of the condos are owned by absentee individuals. (And by the way, the estimate is at LEAST 25% of those are love-nests their spouses have no idea are owned by their partner...but their boy/girl friends are very aware of it...).

Don't worry, this is just the really- and mega-rich trampling all over the lower and middle class types. (...and 30-50% of those are owned by those of nationalities other than the USA).

Posted by beneficial | October 4, 2007 8:43 AM

beneficial -

Another dirty little secret of the subprime mortgage crisis -- 'investor owned' properties are at all time highs. On these, when the ARM reset comes, the owner will walk, with the note holder bearing the brunt of the loss.

Posted by BT | October 4, 2007 9:21 AM

And in Houston. While the basically infinite supply of land (no zoning laws) restrains prices on the low end, and to some extent in the middle, the high end has appreciated like crazy over the last 2-3 years. Now, we're obviously not at anything like New York or London levels, but I think the growth rate has been somewhat comparable.

Some info. here: http://www.chron.com/disp/story.mpl/business/sarnoff/5026453.html

Posted by Amber | October 4, 2007 9:26 AM

BT:

And that's a bad thing? I would argue the subprime mortgage crisis, booming construction activity in Dubai, absentee landlords in Vegas and lax zoning laws in Houston are all good things for the low and middle class. They are all basically evidence of the free market / capitalism making are overall economy stronger.

Posted by Fever | October 4, 2007 9:54 AM

"They are all basically evidence of the free market / capitalism making are overall economy stronger. "

They are evidence that people with no stake in the community have significant power and influence within it. To a great extent, these are people with no interest in schools, hospitals, crime (provided their sanctuaries are maintained), etc.

On the flipside, these arrangements can often result in large infusions of tax revenue from people who will not be using schools, hospitals, or other public facilities to a significant extent.

It isn't necessarily a good or bad situation. How it affects the community is very much dependent on how corrupt the government is. Bribing local officials can be more cost effective than paying taxes.

Posted by Njorl | October 4, 2007 10:36 AM

Why is it so difficult to believe that prices could rise contemporaneously with growing supply? Demand is rising faster; problem solved.

Posted by Nonemoreblack | October 4, 2007 11:15 AM

Fever -

The subprime mortgage crisis is hardly making the economy stronger.

Asset bubbles destroy capital. Consider the investment banks which this week wrote down over 10 billion dollars against subprime mortgage loans. That money could have been used productively in some other aspect of the economy.

Posted by BT | October 4, 2007 11:28 AM

Megan, interesting insight. I'm not much on economics but if you have a chance would you give me your take on the falling dollar. I've heard that in a couple of years the Chinese may be putting their manufacturing plants in the United States because the cost of our labor will be cheaper than the cost in China becasue of the dollar's plunge.

I'm also told that the collapse of the dollar will be good for the country since manufacturing will increase and the illegal immigration influx will reverse itself since the Mexican peso will be worth much more than the dollar.

Posted by Llyonnocl | October 4, 2007 11:37 AM

BT:

My point exactly. Wall street, rather than giving money to deadbeats should have been investing in other areas of the economy. If it wasn’t for the meltdown and capitalism doing its job, we would be in a far worse situation in the future.

Posted by fever | October 4, 2007 12:20 PM

This reminds me of an episode of 30 Rock last season in which Tina Fey's lawyer boyfriend gets a big promotion and raise and immediately sets out to find a bigger apartment in Manhattan. As he and Tina stand in one and crow about how great it will be, a middle eastern guy and his son waltz in, decide immediately that the place will make a great garage for the son's motorcycles, offer way more than the asking price, and waltz out, leaving the crushed Tina Fey and boyfriend, and ecstatic real eastate agent.

Posted by Christina | October 4, 2007 12:32 PM

As a banker and resident of Dubai, I can think of plenty of reasons for the skyhigh rents.

First, while there is enormous construction activity going on presently, only a handful of projects are actually completed. Most of the projects are slated to be completed in 2008 onwards. So supply still lags considerably behind demand.

Second, there are a large number of absentee owners of Dubai property, and these come in various guises....there are rich Iraqi exiles, Russian and East European mafiosi, Indian and Pakistani busienssmen, Iranian "mullahs", etc. A common thread among these people is vast sums of illegally-gotten funds which they have invested in Dubai. These owners are least motivated to rent out their properties.

Third, when the projects are completed, there will be a serious shortage of utilities (electricity, water, gas, telephone service, etc.) which would render the properties uninhabitable......and hence buttress the skyhigh rents.

Fourth, it is a definite fact that many owners intentionally keep their properties vacant in the hope of driving up rentals.....this trend may have decreased somewhat in the recent past, but there are still many instances where the owner will not rent an apartment if he/she does not get the asking price.

Posted by Ali | October 4, 2007 3:02 PM

I very much doubt that sub-prime mortgages in the USA have anything to do with prices in Dubai.

Posted by markm | October 5, 2007 4:53 PM

Oil prices have nothing to do with supply not keeping up with demand. In fact much of Dubai is populated with non-oil related business due to the zero percent corporate tax rate. And construction in Dubai is massive. But what is forgot is that massive numbers of immigrants move to Dubai legally every single day. And the government there intends to allow hundreds of thousands more to come.

I find the idea that owners keep apartments empty to drive up rents absurd. If the apartment is empty the owner receives no income from it at all. Considering the large number of owners in the city the idea of collusion between them borders on the wacko thinking of the 9/11 Truthers. Around 80% of the residents are immigrants. So you have massive increases in demand. Construction takes a little longer than immigration does -- unlike the US where one can construct quickly and take decades to legally immigrate.

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