Dubai's vibrant property market playing devil's advocate

Dubai's vibrant property market playing devil's advocateImage Credit: Supplied

Some say boom and some say bust. Who is right? Dubai's vibrant property market is unquestionably exciting to watch and, as it is, often a topic of many animated debates. It would therefore make sense to explore both sides of the argument.

To be bullish

On a global context, Dubai's property market is still undervalued in terms of price per square foot, ranking as a cheaper city to buy luxury residential property than 18 other cities around the world, including London, Mumbai, Sydney, Singapore and Hong Kong. Indeed, London luxury property is approximately six times costlier, Hong Kong is seven times Monaco an incredible ten times more expensive.

This line of argument becomes even more compelling when considering Dubai's market in terms of a population's wealth, average earnings and disposable income. The white-collar workers in Dubai are among the highest paid in the world, yet Dubai is still considered a very affordable place to live as can be seen by its ranking this year in the Economist Intelligence Unit's 2014 World Cost Of Living Index, where Dubai was ranked 94th out of 131 cities surveyed.

With continued population growth, resulting in many independent forecasters predicting demand to outstrip supply over the medium term, coupled with high earnings potential and a very affordable market, it is clear that there are many market fundamentals that will allow prices to trend higher over the medium to long term.

To be bearish

Dubai's property market is still in its infancy, with the memories of the 2008 financial crisis still etched in people's memories. The bears will be of the opinion that confidence and market sentiment will drive this market in the short term to a greater extent than any longer-term positive fundamentals.

The problem with a volatile market that appreciates in value rapidly over a very short period of time is that it calls into question the genuine foundations of value. The value of a property market is not tangible. In fact, value is created by a number of component parts, which include the collective psychology of the people, the genuine demand versus speculative demand and, of course, supply.

In addition, the cost of credit has an influence on value. With interest rate hikes somewhere on the horizon, this does not bode well for capital value.

Having looked specifically at the transaction volume in the prime villa communities in Dubai, it would appear that it has been a year of consolidation and change thus far. Transaction volumes are significantly lower in many prime villa communities this year when compared to the same period last year, with a general feeling of reduced buyer demand and increased supply.

It would appear that there is reduced speculative demand, which in the longer term will probably improve the stability of the market, but in the shorter term this could put downward pressure on pricing.

As we are now five years into the global recovery, albeit a weak one at best, it would still be reasonable to assume that we are reaching the latter stages of this business cycle. Is a cyclical downturn due in many markets around the world, specifically, in Dubai?

Balancing the debate

The above arguments are just a small selection of many that will be discussed across dinner tables in the weeks and months ahead. But if truth be told, it would be foolish to attempt to definitively predict the trajectory of Dubai's property market.

As always, the right decision for one person could be the wrong decision for another, as personal circumstance is the most important variable to consider when deciding whether to buy or sell property in Dubai.

With regards to the risks involved, I think it is important to remember that risk is attached to both sides of the coin. Choosing to buy carries risks, while choosing not to buy also has risks. Hoarding cash often feels like a risk-free approach to personal finance, however, it can often be the worst passive investment decision you ever made.

Did you know that investors look elsewhere as UAE residential market shows limited growth

Source: John Lyons, Special to Property Weekly

The writer is Sales Manager at Espace Real Estate. Lyons specializes in high-value residences in prime villa communities


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