Why you should care

Because foreign investors and international banks have a lot on the line — again — and history often repeats itself.

The desert emirate of Dubai is known far and wide for its feverish construction mania: The world’s tallest building is here, along with plenty of other atmosphere-scrapers, plus entire islands forged by man for even more land to build on. Despite the abundance, U.K. native Rita Walker, who has invested in Dubai properties several times, isn’t ready to buy again. Why? Because she’s no dope. Prices are too high, she says, so Ms. Walker is renting instead.

Five years after Dubai’s property bubble burst in historic fashion — when hundreds of projects collapsed, including a development that was supposed to be the size of Hong Kong — the ambitious little emirate is at it again. Home prices have soared more than 50 percent since 2012, and the government’s latest announcements of jaw-dropping plans are raising concerns that Dubai is heading for another crash. The international financial community is closely watching. They should. Some 39,000 homes are planned for Dubai Creek Harbour at The Lagoons, complete with yacht clubs and a marina, which will sit near a wildlife sanctuary. Not far away, Mohammed Bin Rashid City will include more than 100 hotels and the world’s largest shopping mall — and cost $8 billion.

If investors withdraw again, “then expect a major correction.”

When sales collapsed in 2009, the government-owned company Dubai World was forced to restructure $25 billion in debt, mostly with international banks. These days, Dubai and its government-related businesses have an estimated $78 billion worth of debt maturing in the next three years, according to the International Monetary Fund (IMF). Harald Finger, the head of the IMF mission in Dubai, told reporters in 2014 that the emirate’s overheated market and new boom in buildings “could exacerbate the risk of a real estate bubble.”

Developers, to a large degree, are banking on the “if you build it, they will come” business model — if you can even call it that. Part of their hope lies with Dubai’s government, which has vowed to attract 20 million tourists — a year — by 2020 as part of its plans to host the Expo 2020 world’s fair. (That’s double the annual total of tourists they get now.) Meanwhile, the emirate’s government says its population is forecast to grow by 50 percent by that time, to about 3.4 million. Developers are hoping massive growth in the ports and aviation sector of Dubai will lure more homebuyers. Some think the government’s ambitious expansion plans are working: “They are creating thousands of new jobs and thousands of new households,” says Faisal Durrani, international research manager for Cluttons, a property agency.

Yet many don’t realize that expats make up more than 80 percent of the population in Dubai, which has little of the oil of its (much) wealthier, neighboring emirate, Abu Dhabi. And the real estate market is still dominated by international investors, who are often spooked by an economic slowdown. If interest from international buyers continues to grow, “then so will prices,” says Craig Plumb, head of research for the Middle East and North Africa region for Jones Lang LaSalle, a property consultancy. But, he warns, if investors withdraw again, “then expect a major correction.”

The slowdown has only temporarily eased concerns.

To be sure, Dubai’s government has rolled out a series of measures designed to address some of these concerns and to cool the market. It doubled the fee for transferring a property, from 2 percent to 4 percent of the home’s value, and now requires international buyers to finance 75 percent of a deal. This, coupled with high prices, has left many consumers like Walker watching from the sidelines. In fact, sales have stalled in Dubai — it’s the first quarterly drop in four years, according to Knight Frank, the international real estate agency. “Buyers are not willing to pay what sellers are asking,” says Mario Volpi, managing director of Dubai-based agency Ocean View Real Estate.

But the slowdown has only temporarily eased concerns. More than 35,000 new homes are still expected to go on sale by 2016, and local Emirati developers will (once again) be courting international buyers. That’s where the problem lies. “Flippers” — buyers from around the world looking to quickly buy and resell apartments — fueled the last property bubble until it popped; when prices plummeted, banks feared the emirate would default on its loans, and thousands of international investors were left owning apartments in projects that were as elusive as a mirage. Translation: They were never built. “No one wants to see a repeat,” says Plumb.

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