What’s gone wrong? Dubai was the ultimate property bubble. Sheikh Mohammed wanted to build 1m new homes in 15 years — an epically extravagant plan, even in the boom years. The problem was that the foundations of the property sector, like some of the developments themselves, were not secure. Chris Dommett, who runs the Dubai operation of the mortgage advisory company John Charcol, says the market was “a classic pyramid scheme”, and unsustainable — though, he adds, nobody foresaw prices falling as sharply as they have done.

From 2000 until last year, developers used borrowed money and deposits raised from off-plan sales to fund razzle-dazzle schemes. Lax regulation meant developers could take deposits before they had even broken ground, and even use deposits taken from buyers in one development to fund the construction of other developments.

With deposits as low as 10% of the purchase price, speculators piled in, reserving entire floors of new developments and flipping all the flats for a higher price before they had to pay the next staged payment. The more they sold, the higher prices rose. The higher the prices, the more they bought. Round and round the fizzy cycle went.

Then, when the credit crunch hit last year, the economy turned on a dirham. Private developers suddenly found they could not borrow from banks. The Dubai government, which controls Nakheel, Dubai Holding and Emaar — which together account for more than 80% of all property development in Dubai — could not borrow on the wholesale markets. With almost no oil of its own, Dubai depends on borrowed money and support from the federal government, largely bankrolled by Abu Dhabi.

Long-term investors who had bought off-plan homes that were almost finished could no longer borrow from the banks, so missed their final payments and defaulted. Spooked by falling prices, new investors walked away from deals, forfeiting their deposits. The result, as Dommett puts it, is that the housing market has “effectively stopped”.

Developers who once rushed to launch a project every few months are racing to abandon them. Peter Riddoch, the Scots-born boss of Damac, Dubai’s largest private-sector developer, says: “We won’t launch any new product in Dubai in the next year.”

Greedy speculators, fast-talking developers and the global slump are not the only factors behind the bust. Many investors were foolish. Gupta, for instance, admits he was suckered into believing prices would rise for ever, and brushed off concerns about Dubai’s lack of legal or regulatory framework. The court system is in its infancy, leaving investors unsure what rights they have if developers go bust.

Was Dubai’s desert dream a mirage, or can the government sort out the mess? And when, if ever, should investors think about re-entering the market?

“Dubai property is not a busted flush,” says Andy Dukes, an IT entrepreneur, as he settles into his lounger next to the chilled swimming pool at one of two villas he owns on Palm Jumeirah. “The market is no longer on amphetamines, but it’s still a great place to live and make money.”

Dukes, 45, moved to the emirate from St Albans three years ago after selling his internet firm, which pioneered e-mail greetings cards. He spent £3m buying two villas and two flats on the Palm, has sold both the flats for a healthy profit, and lets one of the villas for up to £3,000 a week. Taking into account the profit he’s made in the

good years, and allowing for the 30% fall in the value of the pound against the dirham over the past year, he reckons he has made a net profit of more than £500,000 — as well as enjoying what he calls “a dream lifestyle”.

In spite of the slump, some analysts say the fundamentals of the property sector are sound. The cancellation of new projects will ultimately support prices by cutting supply; as the economy picks up, more people will move to Dubai and need somewhere to live.

The government is tackling the immediate liquidity problems, raising up to £12 billion in a bond issue it is using to bail out cash-strapped state-backed companies, notably Nakheel. A better regulatory framework for the property sector is being introduced: new laws will stop developers taking payments for properties before they have broken ground. Bankruptcy legislation will offer investors legal redress when developers either fail to complete planned projects or go bust.

With oil prices recovering, and banks and developers recapitalised, Blair Hagkull, who runs the property investment and advisory outfit Jones Lang LaSalle in the emirate, sees this year as “a period of correction”, with prices continuing to fall until Christmas. Next year, he says, “we will witness market stability”, with prices and rents recovering in 2011. At that time, Hagkull advises looking to established locations such as Dubai Marina, the Downtown area around the Burj Dubai, and the Lakes, Meadows and Springs estates. Buyers should avoid off-plan sales and buy completed properties from developers with a proven track record of delivering high-quality homes.

The advice comes too late for David and Leanne. Their dream is over. The sooner they can leave, they say, the better. As D-day — departure day — nears, their nerves are shredded. Leanne is worried that her bank, which recently cancelled her credit cards, may have registered her as a debtor, and that she will be refused the right to leave when they get to the airport. If that happens, David could take the children himself, but he does not want to leave his wife behind. “All we can do is pray,” she says. “Then pray some more.”

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