Best property price gains in Dubai are done and dusted

Peter Cooper looks at Dubai homeowners' prospects for 2014.

So Dubai Land Department is planning new rules for off-plan sales and its director general Sultan bin Mejren is warning that house prices may rise 35 to 40 per cent this year. However, having claimed the crown of fastest growing house prices in the world for the first nine months of 2013, Dubai homeowners will probably see lower house price gains in 2014.

This forecast is easy enough to make. Knight Frank reported Dubai house prices rising by 28.5 per cent in the first nine months of 2013, the fastest growth in the world. That was actually a lot lower than Cluttons’ estimate of a 53 per cent price increase.

Is that not an unsustainable price spike? That said, the risk of a substantial correction from the runaway gains of the past two years is low.

Price rises on this scale are almost always unsustainable in any market because of buyer fatigue. Basically the market runs out of buyers due to the rush to buy.

True, Chinese house prices have rocketed for a year or two at this kind of clip in the past decade, but there have been some huge corrections in cities like Shanghai too. Dubai, of course, beat them all with its 60 per cent house price crash in 2009.

Is history going to repeat itself so soon? That looks unlikely.

There’s been nothing like the borrowing to finance speculation in property during the Dubai boom before 2009. What has fuelled the market in the past two years has been a strong influx of cash buyers from all over the world, although with particularly strong growth in buyers from Russia, China and Arab countries. It’s a 55 to 60 per cent cash market.

Dubai property looked a good buy as a depressed asset class with house prices way below those of comparable global hub cities such as Singapore or Mumbai, let alone Hong Kong or London.

Many of the same buyers also own homes there. Dubai has also offered good, tax-free rental yields at a time when such income streams are increasingly hard to find in a world of low interest rates.

Nonetheless, as far as I can tell the Dubai property market changed significantly in the fourth quarter of last year. The villas I tipped on my website back in the second quarter of 2012 in Jumeirah Park seemed to peak in price in the late summer of last year and have dropped about 10 per cent since. Still, those who invested are still 65 per cent up on that deal.

The sudden doubling of the transaction tax from 2 to 4 per cent in October caused a hiatus in the market when some transactions collapsed. Similarly a tightening of mortgage deposit requirements by the UAE Central Bank from December 28 has dampened marginal demand.

A year ago the total number of residential units for sale and rent in Dubai on the website propertyfinder.ae was 45,000, well down on the mind-boggling 105,000 in the crisis. In the middle of last month, there were 73,000 units there for sale or rent.

The fear for the immediate future is that demand for Dubai property is probably already peaking for this cycle, while the supply of new units is just beginning to dump a lot of stock on to the market. At the very least this should moderate the recent upward momentum in prices.

If it were combined with another global financial crisis, say a repeat this time of the 1994 bond market crash for instance, then we could see a far more serious correction. In 1994 global interest rates doubled and that smacked many equity and housing markets hard.

Dubai is indeed mainly a cash market for real estate. But where are the buyers getting all that cash to invest? The chances are that some of it is being thrown off by rising global equity prices or being borrowed cheaply elsewhere. Besides, the influx of new buyers has been mainly from overseas and foreign investors well known to be fickle.

Then again we may be too early with this warning.

Knight Frank has Dubai as the best performing real estate market in the world again in 2014, albeit with prices up by a lower 10 to 15 per cent. Momentum in property prices often works this way and the up cycles are usually longer than in stock markets.

Still, the best price gains are most likely behind us.

Peter Cooper is the editor of ArabianMoney.net