Dubai's residential market could face a chronic shortage with population growth expected to drive a development boom.

According to property consultancy Knight Frank, external drivers such as the recently announced Dubai Economic Agenda 'D33' will lead to a demand for human resources. By this stage, Dubai's population is expected to increase from the current 3.5 million to 6 million, with the figure reaching 7.8 million in a few years' time, according to the Dubai City Masterplan 2040.

"The Dubai City Masterplan 2040 raises this figure to 7.8 million in a few years. In fact, the city's current housing stock will need to almost double if it is to meet its population target, which the government expects to rise to 7.8 million by 2040," said Faisal Durrani, Partner and Head of Middle East and Africa Research at Knight Frank.

Faisal Durrani, partner and head of Knight Frank's Middle East and Africa research group, said: "Indications are already pointing to a projected housing shortage in Dubai in the long term. The first is that Dubai's gross domestic product (GDP) grew by 2.8 per cent in the 12 months to the first quarter, and the continued dominance of sectors such as retail, trade, airlines and hotels pushed Dubai to win the honour of having the world's highest average hotel occupancy rate in the first half of the year, with the emirate's nearly 150,000 rooms having an average occupancy rate of 78 per cent.

In addition, the emirate's Purchasing Managers' Index (PMI) for non-oil sectors has remained expansionary for the second and a half consecutive year. Companies are hiring and expanding aggressively, leading to a tight supply of Grade A office space," he added.

According to experts, new home construction continues to expand in other parts of Dubai, although supply remains tight across the city's main neighbourhoods.

Knight Frank expects 85,200 homes to be delivered by the end of 2028, 69 per cent of which will be flats (59,000 units). Some 40,000 homes are expected to be completed this year alone, some of which may be delayed until next year.

Shehzad Jamal, Partner - Head of Strategy & Consulting, Middle East & Africa, Knight Frank, said: Excluding 2023, and assuming that all of the 40,000 homes expected to be completed this year are delivered on time, the 42,500 homes scheduled for completion between 2024 and 2028 represent an average of just 8,500 homes per year, a 75 per cent reduction in the long-term rate of residential delivery.

This momentum strongly suggests that house prices will also face continued upward pressure, especially as the population continues to swell, the industry expert added.

According to data released by the Dubai Land Department, the real estate sector in Dubai completed 76,119 transactions in the first half of the year, with a value of Dh283 billion ($77 billion), with the coveted Golden Visa also fuelling demand from foreign investors.

The latest findings from Knight Frank show that continued demand is driving up house prices across Dubai, with prices up 4.8 per cent in Q2 2023 compared to Q1, and soaring 17 per cent in 12 months.

The data shows that flat prices have risen by 21 per cent since January 2020, with the average price now standing at Dh1,290 per square foot. Villa prices continue to be sought after, with an even greater increase of 51 per cent over the same period, with the average price now standing at Dh1,520 per square foot.

Despite the significant increase, prices in the city are still 11 per cent below their 2014 peak. As things stand, the relatively long-term price growth shows no signs of slowing down.

If anything, all market dynamics continue to point to further increases, especially in villas, as supply and demand dynamics remain out of balance, particularly in prime markets in cities such as Jumeirah Bay Island, Emirates Hills and Palm Jumeirah, where villa prices rose by 11.6 per cent in the second quarter and by 125 per cent since January 2020, Durrani said.

Not to be outdone, villa prices in other parts of the city remain strong, at 5 per cent above their 2014 peak. More affordable locations have also experienced strong price increases on a price per square foot basis. For example, villa values in Dubai Hills have increased by 24 per cent in the last 12 months alone, making it the fastest growing area in the city.