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Gulf governments will intervene rather than see property bubble burst

Sunday's intervention of Kuwait's central bank to guarantee deposits and its bailout of the country's largest banks is the first in the oil-rich Gulf but won't be the last.

Oil prices are down more than 50% from their July highs, stock markets continue to fall steeply but it is a steep fall in property prices that is feared the most.

High oil prices have allowed state and private investors across the Gulf to funnel billions of dollars into the property market. At the moment oil prices are still high enough to provide generous budget surpluses as Gulf States need an average price of $47 a barrel to keep away from budget deficits, according to the International Monetary Fund.

But governments and private corporations have invested heavily in the property sectors, particularly in Dubai where Fitch Ratings estimates that government owned or partially owned developers control 50% of new property developments due to come onto the market.

Also banks, many of them partly government owned, have been lending heavily to developers and property investors. So when it comes to property a significant fall in prices could crimp government finances.

Finance is drying up and property speculators are bowing out, according to Tanya Vodenicharova of Dubai real estate broker 9 Properties. 'Property investors are not finding buyers,' she said.

And Dubai does not have a lot of oil. 'Dubai's supercharged growth is based on debt. During the current financial crisis, overseas borrowing and re-financing are much more difficult. Questions are being asked about Dubai's ability to pay back its loans,' said one analyst.

Government intervention is inevitable according to another. 'Given the overriding paternalism of the public sector, it seems unlikely that governments are yet ready to tolerate high-profile bankruptcies or defaults,' said Tristan Cooper, vice president for Moody's Investor Services in Dubai.

But if prices fall significantly it would further strain revenue and finances for government-controlled entities increasingly reliant on hard-to-come-by overseas borrowing.

Real-estate agents in Dubai said they're now seeing a clear slowdown. They say speculators, especially those who were financing their property investment, have largely fled the market.

'Nobody wants to buy,' said Lillian Gold, a property consultant at Blue Horizon Real Estate in Dubai. 'Everyone wants to sell.'

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