Buy versus rent: Be pragmatic not speculative

When should you make that crucial decision to buy an apartment instead of renting one? What should be your affordability threshold? Will the economy hold steady or will the housing market go on a roller-coaster ride again? Will that attractive villa remain unsold for the next few months?

The decision to rent or buy property is unique to every individual. Fortunately, the UAE’s economy is now on an even keel — the International Monetary Fund estimates a modest 3.5 per cent growth this year — and its housing market is more stabilised despite fluctuations in oil prices. The trade, tourism and services sectors and World Expo 2020-related investment in infrastructure and property continue to attract a large number of people into the country.

In the rent-versus-buy conundrum, it’s essential to make a cool-headed estimate of the property market. The housing sector in Dubai can still be unpredictable. The sector surged early last year on the back of a strong economy, with rents going up by 15 per cent and selling prices up by 20 per cent as a whole.

In the fourth quarter, however, activity cooled down considerably. Dubai’s real estate sector ended on a quiet note last year as nearly all segments witnessed subdued growth. Now, the latest estimates by international property dealers indicate that after remaining flat for the past four to six months, prices and rents are likely to drop this year by an average of 10 per cent.

The fact is that housing prices had risen too high — for two years until middle of last year, they rose by nearly 56 per cent. Dubai was pricing itself out, becoming too expensive to live and work in. The lower forecast for this year is based on a lack of affordability in the market. In this scenario, developers tend to offer inducements such as extended payment terms, rental guarantees and even cars to woo new buyers.

Set the ball rolling

For prospective buyers, it is now easier to buy property as the regulatory environment is more evolved and stringent. The Real Estate Regulatory Agency’s tighter regulations on developers have led to dramatic reductions in speculation, especially on off-plan sales — hopefully Dubai’s property market crash should be a thing of the past.

A tighter regulatory regime has put the brakes on so-called flippers who drove speculative trading and unknown fly-by-night developers who announced grand projects that never saw the light of the day.

In fact, the market is regulated to the extent that every development that has been started or launched will be completed. Regulations such as doubling the transaction fee from 2 per cent to 4 per cent have had a positive impact on the real estate market. While trading will continue, developers will be unable to sell properties in a bubble as flipping is not an attractive option.

Mature finances

The financing market too has matured since the crash of 2008. A positive impact of stricter bank regulations has been the creation of a level playing field for all banks catering to the financing market. They now strive to provide competitive home financing rates and improve their services. Tenors are attractive as well, stretching up to 25 years for residents and 15 years for non-residents.

From a buyer’s perspective, there could be some downsides to this. For instance, in the pre-crisis era, a buyer could borrow amounts of up to 95 per cent of the value of a property, while the underwriting by banks was criticised for being too relaxed.

The financial institutions also came under pressure to implement high loan-to- value (LTV) ratios of up to 110 per cent. The financing industry has now changed for the better and is far more careful. LTVs are capped at 75 per cent for the first purchase and 60 per cent for the next. This has stabilised the housing market and created greater reassurance for customers as well.

Also, a higher down payment has its pros and cons. While it is a bigger burden on customers, it has helped curb the buying frenzy of 2006-07. In today’s market, aside from the down payment a customer also needs to fork out about 8 per cent of the property’s value for additional charges.

Good time to buy?

So we come back to the question: Is this a good time to buy or should you continue to rent? Ultimately, whether it is an appropriate juncture to take the plunge or not depends entirely on the needs of an individual or family.

Buying property for investment purposes is always a gamble as the timing has to be perfect. No one wants to buy at the top of a market cycle. If, however, a family is buying an apartment for its own use, then the decision must be based on affordability of current prices, location and aesthetics.

Spiralling rents should also be factored into your decision — in fact, many tenants are now seriously considering buying property. So instead of paying high rent, you could start building equity in your property. A high-rent regime works to a homeowner’s advantage too, as yields are climbing rapidly with the influx of expats and high-income earners into the country who are in need of short-term housing. n


Source: Arshad Rana, Special to Property Weekly

The writer is the Head of Portfolio and Channel Relationship at Noor Bank.



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