What factors determine the outlook for Dubai real estate now?

Two major factors will determine whether Dubai property prices this summer actually prove to be bargains, or whether even cheaper prices are to follow: economic circumstances and new supply of property.

How many people will leave Dubai this summer, their jobs culled due to the economic crisis? How many will move out because they can no longer afford the high school fees? Will business pick up in the autumn or continue to deteriorate, necessitating further job cuts?

The oil price – which determines the health of trade into and out of Dubai – is falling and the outlook does not look great for higher oil prices with the global economy in deep recession. And if people are nervous about their jobs they are unlikely to be buying homes. This is a negative feedback loop.

Upcoming supply

Then again the supply of property continues to increase as new developments are completed and even more space becomes available for the seemingly limited pool of buyers. Just look at all those buildings still under construction as you drive around Dubai. That is yet more supply, and if you have more supply than demand that means falling prices.

This tends to the conclusion that the dramatic price falls seen in Dubai property over the past six months do not represent the market bottom. What went up has come down, but still seems to be heading down, even if the worst of price falls are over. That is obvious enough, as once you are past 50 per cent mark you just cannot fall as far again.

In order for house prices to start a recovery then you normally have to see a break in the cycle of decline for a specific reason. That might be a fall in interest rates, for example, which tempts buyers back into the market; or it could be that economic conditions improve and rents begin to rise, making tenants think about buying to avoid rental payments.

Dubai property watchers are keeping a keen eye open for news about Amlak Finance and Tamweel, the two Islamic home finance companies that suddenly ran out of money to lend last autumn. The hope is that a merger entity will emerge from the intervention of the UAE central bank, or that the two companies will return to the market with funds to lend again.

However, unless Amlak Finance and Tamweel offer significantly better terms to borrowers they are unlikely to make much of an impact. There is adequate home finance available presently from more than 20 local lenders, albeit at mortgage rates significantly higher than a year ago and with high deposits.

There is also a chicken and egg situation here: buyers are not keen to take home loans until house prices stop falling, while prices are not going to stop falling until buyers take up mortgages again.

Confidence falling

Of course buyers are very weary of falling house prices when they have to put down a 20 per cent deposit on a loan, as that is the first money that is eaten up by falling house prices while the loan amount will remain unchanged. This can lead to a negative-equity situation where the sale of the house will no longer cover the outstanding loan.

Cash buyers can and do take a longer view, and can take comfort either from rent saved on their own accommodation or earn a rental return. However, with rental costs also falling in Dubai alongside capital values there is a contrary argument that it might be better to pay a falling rent than risk a further fall in house prices.

Thus many potential buyers are sitting on the sidelines while prices find a new bottom. In an open, free-market economy like the UAE, with foreign capital free to come and go, there has to come a point when the market mechanism re-sets house prices to a level acceptable to buyers and sellers, and life moves on. Unfortunately that point has yet to be reached and a long hot stalemate over the summer months looks in prospect.