80% cash buyers a major strength for the new Dubai real estate boom

Posted on 08 July 2013 with 1 comment from readers

Booming Dubai real estate sales and among the highest price rises in the world this year have largely been down to an inflow of cash buyers into the market.

Total bank finance for all property in the UAE of just $42 billion has actually been falling with total outstanding mortgages in decline, the UAE Central Bank reported this week.

Buyers are coming from a very wide sweep of nations. Sure there are the rich exiles from Egypt, Syria and Libya. But more important in the local market are Russians, Iranians, Indians and Pakistanis, with the British rather less so these days.

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Debt-free house price rises

To get this sort of recovery without a surge in bank borrowing is unusual to say the least, and very bullish for the medium term. Prices are being pushed higher without people overextending themselves with debt. Indeed it is largely being achieved without any debt at all with around 80 per cent of transactions in cash, according to the Dubai Land Department.

This is true safe haven buying and shows great confidence in Dubai as both a long-term home for investment and perhaps also as a home. There is also a realization that property in Dubai is cheap by international standards and could rise much further in price. A simple price arbitration is taking place.

Local rental yields are still high by the standards of major international cities and property represents good value for money in terms of income as well as absolute price.

However, it all depends what you take as your benchmark. London house prices are way more expensive, so too Hong Kong and even Singapore. But Dubai is the most expensive market in the Middle East, and starting to look pricey against some secondary global locations.

How high can prices go? Well they have yet to pass the peak of the last boom just yet but on current momentum should do later next year. Is there an upside after that?

Bank lending to come?

Quite probably because eventually the buyers will turn to the banks to borrow more. After all this is how international hub city house prices have been driven so high. Only when people have leveraged up on their investments and overdone it will the housing boom be over in Dubai.

Problems in global credit markets – with mortgage interest rates on the way up – could actually extend the Dubai boom because this will delay the arrival of a credit boom to push house prices to their limit, though house price rises will also therefore not be as dramatic as would otherwise be the case.

If nothing else the preponderance of cash buyers puts a firm base under Dubai property and makes another crash like 2008-9 highly unlikely. Dubai property will have to reach much higher prices with much more mortgage debt for that to happen again.

That said subscribers to the ArabianMoney newsletter (click here) who followed our top property tip last year have made 50 per cent on their investment, and others without the benefit of this hot advice are up 20-30 per cent, so there is no denying the boom is back.