Dubai and Abu Dhabi housing markets show signs of overheating

The United Arab Emirates' real estate market may be "overheating" and rental yields in its two richest sheikhdoms indicate "growing imbalances", according to the central bank.

Average sale prices in Abu Dhabi and Dubai had risen faster than rents, and such deviations could be "used to identify imbalances in the housing market", the central bank said in its 2013 financial stability report.

The average rental yield in Dubai is about 70 basis points below the historical average and those in Abu Dhabi 130 basis points lower.

"[While] recovery of rental prices started at least a few months before the sale prices had bottomed, growth rate of rents was significantly lower than the increase in prices," said the central bank. The discrepancies could indicate an "overheating real estate market", it said.

Home prices in Dubai rose the most in the world last year, according to Knight Frank, raising concern that a bubble may be forming five years after the market crashed.

Residential property prices gained an average 24 per cent in Dubai and 21 per cent in Abu Dhabi, the central bank said.

The International Monetary Fund in May urged the emirates to enact stronger measures to curb speculation in the property market in Dubai to prevent an "unsustainable" surge in prices.

To avoid another bubble, the central bank last year issued regulations restricting mortgage lending, and Dubai's government doubled transaction fees.

While lending for home purchases rose 12 per cent or 12.7 billion dirhams (HK$26.8 billion) last year, fewer than 30 per cent of residential property purchases were funded through bank lending, the central bank said.

Bank exposure to the real estate sector in the emirates is less than 23 per cent of total loans.

"Bank lending cannot be considered a significant driver of real estate prices," said the report. "Analysis of banking data supports the hypothesis that the current market recovery is mostly driven by equity buyers and/or reliance on external funding sources."

Price growth for villas and flats in Dubai has slowed in the first five months of this year, according to data from property broker Cluttons.