The oversupply of property in Dubai has increased by almost 8 per cent in the past month if you follow adverts for homes for sale or rent on the Dubizzle.com website that have topped 206,000. There are a record 116,000 units available for rent and 90,000 for sale. It’s not that much better in Abu Dhabi, where an astonishing 59,000 units are available for rent or sale, albeit the position for sellers is better with just 3,800 units on the market.
The influx of new residents into the UAE has been overtaken by a surge in the number of available homes. Most probably the flow of newcomers has slowed with a new government in Egypt and maybe the majority of the Arab rich who wish to move to the UAE have now done so. At the same time developers have taken the opportunity to finish off projects launched many years ago in the previous boom as well as to initiate a perhaps too optimistic number of new ones.
I have noted before that a classic three-year property cycle is in operation. It started in late August 2011, when the US$25 billion Dubai World debt rescheduling was signed off. Last year was the price spike stage with 30 per cent gains for property prices and rentals in Dubai. It cooled off rapidly last autumn after transaction fees were doubled and new mortgage rules introduced. This summer is the phase when sales dry up and inventory surges. Presumably in the late summer and autumn there will be price cuts by “motivated sellers” and quite a steep fall in prices over the following six months.
How long it will take to get to the recovery phase is more difficult to say. Another worldwide recession after a crash in global equity markets would prolong the pain, as many recent buyers are members of the global rich whose wealth would suffer most. That said, the underlying strength of the Dubai market, and to a lesser extent Abu Dhabi, is its openness to global markets as a trading hub for the Middle East. A sustained period of much higher global oil and gas prices, for example, would work wonders for a rapid recovery while the rest of the world could stay locked in a deflationary downwards spiral or some sort of stagflation with money printing on steroids. That was what the world looked like in the late 1970s.
Step back from the noise of the investment world and the machinations of geopolitics this summer and ask yourself a fundamental question: where are we now in the global interest rate cycle? Has the pendulum swung too far in the direction of high or low interest rates? No need for a doctorate in nuclear physics to get that one right. Central banks have been squeezing interest rates down for the past six years since the bottom of the global financial crisis, and they were forcing rates lower for the prior decade most of the time too; indeed that was arguably why we got the bubble that exploded in the global financial crisis.
A low interest rate regime is good for bond prices, good for equities if you forget about the higher volatility and excellent news for real estate investors. Property rentals reflect the cost of money, and as interest rates fall then investors are prepared to pay more for property for a given return and prices rise. Homeowners can afford to pay higher and higher house prices as mortgage costs fall.
Stick interest rate increases into the system and you get falling property prices for the same reason in reverse. A lot of property and mortgage experts this summer are talking about higher rates on the horizon. Please note this has an immediate effect. Potential buyers immediately notice, as they are mainly interested in the future cost of money, not what it costs today.
In the UAE this global macro-perspective is compromised by severe oversupply of property this summer. You can be very positive about the outlook for the UAE economy with energy prices heading skyward as the Middle East and Ukraine plunge into chaos and still be bearish about the immediate outlook for local property. A 20 to 30 per cent correction would be a reasonable expectation.
Peter Cooper is editor of ArabianMoney.net
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