The once-booming property market in Dubai has been hit very hard as a result of the global financial downturn and the Gulf state’s debt crisis, while its oil-rich neighbour Abu Dhabi, the capital of the United Arab Emirates has suffered less.

Residential property prices in Dubai have already plunged by some 55% from their peak in the third quarter of 2008, according to a median estimate of 14 banks, investment firms and research institutions contacted by Reuters. While prices in Abu Dhabi have now fallen by 40%.

Patrick Rahal, an analyst at bank The First Investor in Doha, said: “Conditions in the UAE property market will remain weak in 2010 because of unfavorable demographics, property oversupply and risks associated with canceled and delayed projects.”

CB Richard Ellis (CBRE) is expecting new residential supply of 31,194 new properties this year in Dubai and of 10,000 units in Abu Dhabi.

Beyond 2010, expectations are that Dubai prices will remain stagnant in 2011 before edging upwards by 2% in 2012. Abu Dhabi house prices are expected to drop by further 5% next year and then stay flat into 2012.

Only one respondent in the Reuters poll said that house prices in Dubai had now reached the bottom, with others anticipating further price reductions until 2012.

Jesse Downs, director of research and advisory services at Landmark Advisory said: “A wait-and-see approach by sellers could push back inevitable price declines and delay a recovery, as liquidity is likely to remain constrained until 2012”.

Aberjeen Jiwani, research analyst at Securities and Investment Company (SICO) in Bahrain said “Prices are still expensive compared to income levels and I expect to see defaults increase and project delays.”

According to the Reuters poll, residential rents in Dubai are anticipated to fall by 10% for the rest of 2010, then remaining stable in 2011 and rising by 4% in 2012, according to the median forecasts.

Rents in Abu Dhabi are now expected to fall 15% more in 2010, by a further 5% in 2011, then rising by 4% in 2012.