Many developers have already put in price tweaks in a nod to changing dynamics
Most people who buy or sell a home don’t look at valuation ratios. Potential sellers look at what other homes in the area have achieved. Potential buyers work out whether they can afford the monthly payments.
Most estate agents now have in-house mortgage brokers who arrange loans from the banks. With approval processes run through software, many homeowners end up getting loans with monthly payments that are more than a third of their income.
And thus when interest rates rose, mortgages’ share of the market has dropped (after at one time accounting for nearly half of overall transactional activity). They have been replaced by cash buyers driven by investors who continue to see value in parts of the market .(A surge in cash buyers is a classic sign of prices plateauing.)
However, just like in other parts of the world where mortgage rates have shot up, there has been some sort of price fatigue that has set in in some areas, as there is a realization that people do not want to pay at the top, whether in sales or in terms of rents.
Recent Dubai Land Department changes to building classifications and linking it to rental rises will allow for rents to dampen in certain areas. (Curiously, this is being witnessed with an increase in demand for ‘tear down and refurbishment’ properties, which was earlier limited only at the high-end villas in Emirates Hills and Palm Jumeirah). There is no doubt that higher costs of money ultimately feed into asset prices, even as inflation drives up replacement values.
Realtors like to boast that property prices are relatively more stable than other asset classes, but this is not true. In the US, between 1989-95, inflation adjusted prices in San Francisco fell by almost 40 per cent. In 2001, prices in Honolulu and Los Angeles fell by almost a third. In the last year, prices in Austin, Texas, after having more than doubled have fallen by nearly 14 per cent, and inventory levels start to pile up.
In Dubai, prices have risen dramatically, but in most segments remain below their 2008-09 peak levels. The recent resurgence in inflation has made prices even cheaper in real terms, (which partly explains the demand for housing).
But as anybody who has tried to hire a carpenter already knows, there is a still a construction boom going on. Furthermore, as houses are more equitably distributed than stocks, the impact on the economy is greater in terms of spending patterns as interest rates rise, and this then reverberates into new buying behavior.
A differential diagnosis does suggest that there remains value in most mid-income segments (in areas such as Dubailand, JVC and Furjan), but nonetheless that the overall pace of frenetic activity is slowing, as listings and discounts offered start to rise. This will be most felt in areas where prices rose the fastest as developers rushed to provide product in the higher ticket items.
There are many that are not convinced of this argument, stating that a) liquidity remains high b) banks are well capitalized c) foreign demand is sustainable given the demographic reforms that have taken place and d) prices will jump further as China opens up. All of these arguments are valid, and in the final analysis, investment in housing does ultimately pay off over long periods of time (similar to the capital markets).
However, there are cycles that all asset prices are subject to, and for people that are looking to make some quick and easy money, they may discover new meaning in the phrase ‘safe as houses’. All of this is to argue that in an age where data is so easily available, investors and end-users would be better off accessing these data points rather than trying to ‘keep up with the Joneses’.
The writer is Managing Director of Global Capital Partners.
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