Long-term residents should consider buying Dubai property

Posted on 05 August 2009 with no comments from readers

Strange how times change. Yesterday I met an old friend who disagreed with me strongly about buying Dubai property back in 2003. Since then real estate in this city has risen six-fold in value and then halved since last September.

According to the latest Colliers International report there has been a very modest recovery of prices over the past couple of months, though hardly more than a dead cat bounce in market terms.

New buyers

But I was interested to catch up for breakfast in the depths of Jumeirah yesterday and hear my old friend admit, somewhat begrudgingly, that he was about to buy a place in the Arabian Ranches because ‘his wife had got him in a corner’.

Basically her argument hinged on two factors: moving would eliminate an hour long school run; and if they were going to stay another five years in Dubai they might as well stop paying rent now, even if prices went on down another 10-20 per cent; and money on deposit is paying very little compared to what it could save on rent.

This devastating house-wife logic had floored somebody who is a very astute businessman. He used to object to Dubai property in 2003 because there were no proper laws or any method to correctly value real estate, and it all seemed a huge risk. He was right, of course, and that is why property was so cheap.

Overtime the laws have been put in place and further refined with by-laws and the creation of the Dubai Real Estate Authority. But the property crash that my friend always feared did happen, and for the more recent buyers it is very bad news, especially those with big mortgages.

Hong Kong paralell

If you compare the Dubai real estate crash to Hong Kong in 1997 then house prices will still be 35 per cent down on peak values in 12 years time. Indeed, house prices in Hong Kong only bottomed out after five years at 70 per cent down in 2003.

That might leave buyers today with a rough ride for a few years. But if they are cash buyers saving on rent, or saving on rent and paying down a mortgage then buying a property now might still make good sense.

They might also be luckier with inflation than the dwellers of Hong Kong, who took the full impact of falling prices without the cushion of rising inflation.

If inflation takes off globally in a repeat of the 70s – which some commentators think will be the ultimate impact of all the global stimulus plans – then house prices and rents will start to rise, and as salaries tend to keep pace with inflation over time the proportion of relatively fixed debt repayments will fall.

Higher interest rates

On the other hand, inflation would bring higher global interest rates and that would exert a reverse pressure on house prices, and could be the very thing to drive them to the bottom of the current down cycle.

Certainly house prices almost always bottom out in periods of high interest rates, although local mortgages in Dubai are currently expensive at eight to nine per cent so that might actually be the case now. Dubai rates could be on the way down or at least not change much while the world raises interest rates.

At the end of the day a house is both somewhere to live and an investment, and while I can argue against the investment case – as prices probably do have further to fall, the case for buying a home to replace a rental unit is fairly strong, particularly if it improves your lifestyle at the same time.

Home sweet home

My former secretary from many years ago who has gone onto greater things in PR has also just bought a house in The Springs in Dubai. Again it is a very nice house and convenient for work and she gets a good mortgage deal from her bank.

Both these examples of canny new buyers tends to suggest that those nasty foreign press critics of Dubai are barking up the wrong tree, as usual.