Often considered an oasis of limitless growth in the United Arab Emirates (UAE), the emirate of Dubai is widely known for its rapid expansion and lavish extravagance, which is nowhere as evident as in its market for housing and hotel development projects. Luxury is a priority, and as contractors struggle to outdo one another, the cost of projects often reaches billions of dollars. This process has led to the construction of the world’s tallest building, the Burj Tower, and the world’s largest shopping mall, the Dubai Mall, all within the small emirate. But Dubai is not isolated from the rest of the world, especially with regard to financial flows and oil prices, and its economy is undoubtedly susceptible to the worldwide financial crisis. Although uniquely situated among its Arab neighbors due to its increasingly tourism-based and service-based economy, global economic contraction may put cooling pressure on Dubai’s housing market, allowing leaders to focus on the long-term implications of its rapid growth.

Though Dubai’s current national debt stands at US$80 billion, simple economic analyses suggest that its economy is in a better position than that of many Arab states, especially those more dependent on oil production. As a result of persistent government pressure to reorient the economy to service and tourism, only 3 percent of the emirate’s GDP comes from oil revenues, in stark contrast to many of its Gulf state neighbors. With Dubai welcoming around six million visitors per year, the housing and hotel markets have driven the growth of the state. Meanwhile, ample cheap immigrant labor supports construction. Falling oil prices have therefore had only a minimal impact on Dubai, and analysts at EFG-Hermes Holding and the Institute of International Finance suggest that the emirate’s budget surplus will exist as long as the price of oil remains above US$36 per barrel for an extended period, a price that is well below current estimates for 2009.

However, Dubai’s housing market has already felt the effects of financial problems across the world. Although the emirate’s economic indicators remain relatively strong, its housing market is intimately tied to international consumers. As the first Arab country to allow foreigners to purchase land, Dubai has received a large influx of foreigners. Non-nationals, many of whom are fleeing economic stagnation in their home countries, account for approximately four-fifths of the population. Due to an overall decrease in disposable income among both foreign residents and tourists, the amount of money flowing into Dubai from the rest of the world is shrinking. As cash-strapped consumers forgo luxury, housing prices have declined for the first time ever. In the last quarter of 2008, for example, property prices dropped a full 23 percent. These new realities are forcing developers to reconsider projects. For example, several hotels catering to high-end guests, like the Four Seasons and the W, have temporarily put projects in Dubai on hold. Nakheel, the state-controlled development company, also recently froze construction on a skyscraper that would have been twice as tall as the Empire State Building. At Nakheel and many other companies, downsizing staffs has also been a necessity. Because so many construction workers are foreigners, the nation faces a possible mass exodus of laborers. Indeed, the Dubai Ministry of Labor is processing an average of 1,500 visa cancellations each day. Furthermore, it remains unclear whether well-known projects like the Dubai Mall, which opened in November 2008, or the Burj Tower, which is slated for completion in September 2009, will have enough of an appeal to maintain the foreign obsession with the glamour of Dubai housing.

Fortunately, the economic crisis may make the Dubai housing market more sustainable in the long term. Although share prices of many developers have fallen as much as 48 percent this year, the crisis has cooled an economy subject to overinvestment and inflation. The currency used in the UAE, the dirham, is pegged to the dollar, preventing the UAE finance ministry from setting its own interest rates to control rising inflation. But inflation rates have already decreased since summer 2008, reflecting the falling price of oil and increasing scarcity of credit. The British bank Standard Chartered expects inflation to drop all the way down to 2.5 percent in 2009 from 12 percent in 2008. In regulatory and bureaucratic realms, increasingly tight budgets have necessitated an increase in efficiency. For example, government regulation has led to the merger of two major mortgage lenders, Amlak Finance and Tamweel, in an effort to achieve that goal. The discovery of widespread corruption both among the leaders of financial institutions and among developers has undoubtedly resulted in a push for increased accountability in the housing market. Speculative behavior, such as the rapid resale of housing after only paying a few installments of mortgage, has also seen a decline.

Although the cooling of the global economy may slow the housing market and make it more robust, there remain many domestic and international issues that will need to be addressed in order to allow Dubai’s housing market to expand further. An immediate problem lies with the spatial organization of Dubai, which currently is centered linearly along the Persian Gulf. The rapid development of the city has not followed the organic growth of many of the world’s cities, as is evident in the development of synthetic islands to house construction projects. As a result of this infrastructure inefficiency, congestion and pollution have increasingly become a fact of life in the city. Creation of a mass-transit system may be one step towards sustainability, but efficient city growth requires multidimensional expansion. Fortunately, half of the government’s 2009 budget, approximately US$4.65 billion, is slated to be spent on infrastructure spending, though the anticipated results of this spending are still unclear.

The numerous issues surrounding the Dubai housing market after its current economic bubble will likely be of a persistent nature. As the emirate navigates domestic pressures from many diverse directions, it also faces the demands of the West and OPEC. It appears that long-term security will increasingly play a role in housing prices. With the accumulation of smog above crowded roads and a drop in oil prices, the cool down of the property market may signal a need to direct Dubai’s growth towards a more sustainable form of development. Fortunately, the emirate seems to be heading in that direction already.