The 7% Solution

Most of the residents of Dubai (Dubai@Random included) are probably happy that rents for 2007 cannot be increased more than 7%, but some of us pity the poor, downtrodden landlords of Dubai.

Property bubbles form when people buy properties because the property values are going up. Much of the value comes from potential appreciation, so, when the property values level off, they must fall. Sometimes, quite a lot.

Non-bubble property values come from rents. A rent of 100,000 increasing by 15% per year is worth a great deal using business school techniques of analysis: perhaps several million; a rent of 100,000 increasing by only 7% a year is worth much less, perhaps less than one million.

Of course, many landlords will explain that they need to 'redevelop' their property, or move in themselves, in order to raise rents more than 7%. Certainly, The Springs and The Meadows have seen the rent for properties not covered by the rent caps go up more than 100% over the last two years, so honest landlords who only increased 15% last year and 7% this year are charging only about 60% of market rates to stay within the law.

And the law could cause selling prices to drop considerably.