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After witnessing sharp rise in prices last year, Dubai's residential property market is gradually cooling down with a deceleration in the growth of home prices in recent months.
According to Knight Frank's latest Dubai Prime Residential Report, home prices grew by just 1 per cent in the first three months of the year, notably weaker than last year's average quarterly growth rate of 4 per cent. It further states that prices were growing at a snail's pace in the second quarter this year.
''The cooling measures brought in by the government between September and December have all contributed to the relatively weak growth in the past two quarters,'' says Victoria Garrett, Associate Partner at Knight Frank.
These cooling measures included the doubling of the transfer fee from 2 per cent to 4 per cent and the introduction of the mortgage cap. Some developers also offered buyers preferential access to prime units to discourage the reselling of property before its completion.
Analysts say many investors have stayed away from residential property for some time now, preferring to wait until prices became more sensible again.
''The deceleration in house prices is largely due to the transfer fee increases and the restrictions on home finance. But [there is] also the sentiment that buyers have had enough of incessant house price inflation generally caused by greedy sellers,'' says Mario Volpi, Managing Director of Prestige Real Estate.
Last year Dubai saw a 35 per cent year-on-year increase in residential prices, topping the list of global residential property markets. This was primarily driven by a growing positive sentiment arising out of an improving economy, growth in tourist numbers and Dubai's selection as host of the World Expo 2020.
The slowdown shows that buyers and sellers are ready to align with each other's expectations. Market observers feel this was very much needed as no property market can sustain such a frenetic pace of price increases.
''Residential prices initially increased on the back of the Expo 2020 win announcement when some sellers expected the value of their homes to have risen more than the market will allow, thus being non-negotiable on pricing. Once the Expo effect filtered out, seller expectations started to align with those of the purchasers,'' says Dana Salbak, Senior Research Analyst - Middle East and North Africa at JLL.
The sustainability of the latest boom in the housing market is closely being monitored by analysts and the government, which is rightly concerned about the risk of another boom-and-bust cycle. The government subsequently took a number of cooling-down measures last year. but the impact of those schemes are being felt now.
The effects of these measures were also evident in the transaction volumes. Data released by the Dubai Land Department reveals that transaction activity declined in May. The number of apartment and villa transactions dropped by 26 per cent and 49 per cent respectively.
''In the first quarter, transaction volumes across our prime basket of properties were 10 per cent lower compared to the preceding three months and were nearly 28 per cent below a year earlier,'' says Garrett. ''We do not see this changing in the near future.''
However, analysts say it is normal to have seasonal or monthly up-and-down cycles. As the market matures, there will be more evidence of this as it all boils down to the sentiment of the market.
''Currently there is still a very positive sentiment flowing through the market,'' says Volpi. ''I just hope that this is not spoiled by greedy vendors who expect the party to go on forever.''
Despite the stiff price increases in the housing market last year, statistics suggest that Dubai's luxury home prices are still relatively low in historical terms and compared to other global cities.
''In the first quarter, the price of an average luxury home was 15 per cent below 2008 levels, with $1 million (Dh3.67 million) buying approximately 146 sq m of luxury living space in the emirate - six times more space than in London, seven times more than in Hong Kong and ten times more than in Monaco,'' says Garrett.
Notably, she adds, other global cities such as Moscow, Mumbai and Istanbul are also more expensive than Dubai. This suggests there is still some value in Dubai's property market.
More than the transfer fee hike, Knight Frank suggests it's the mortgage cap that seems to have hit the emirate's residential property market especially hard, given that around 25-35 per cent of homebuyers rely on mortgage financing.
However, banks feel such measures were needed to curb speculation and keep the market buoyant.
''We understand the changing customer needs in today's growing economy and the windfall of the Expo 2020 being awarded to Dubai. Having said that, we should learn a lot from what happened during the height of the financial crisis in 2008 - not only in the UAE, but globally,'' says Paul Trowbridge, CEO of United Arab Bank (UAB). ''There are also many things to be learned from the aftermath of 2008.''
He says it's a social responsibility of banks and other financial institutions to help customers choose the right lending terms. This will be beneficial to all parties and the market in the long run.
Meanwhile, the Central Bank, in its Q1 2014 Credit Sentiment Survey, stated that financial institutions are expected to loosen their credit standards for both residential owner-occupiers and investors. This as - amid a lucrative home loan sector - banks are always trying to outperform each other.
''Interest or profit rates are not the only way they attract borrowers.
''Adding incentives such as waiving of processing fees or offering free insurance are winning over customers,'' says Volpi.
UAB, for example, has introduced the Step-Up Home loan, which takes customer affordability into account. With this product, UAB offers lower installments in the first four years by gradually changing the rates yearly starting at 3.99 per cent reducing balance, with discounts on the processing fee.
Trowbridge says it's important to understand the factors driving the price rises and lend accordingly and responsibly. ''At UAB, our prudent credit and lending policy and strong liquidity centre put us in a robust financial position and enable us to continue to support a wide base of customers in the UAE and across a range of industries, including real estate and contracting, while maintaining the quality of the assets,'' says Trowbridge.
The current slowdown seems to have no bearing on the confidence of developers who are upbeat about the economic outlook.
They see a positive trend in Dubai's real estate sector, driven in part by new opportunities in construction, tourism and trade.
''We are getting ready to increase capacity as there will be a sharp surge in business demand in the next few years, and it's our responsibility to create a sense of urgency combined with optimism to complete projects,'' says Ahmad Khalaf Al Marri, General Manager of Union Properties.
Many developers also say there is no need to worry about a temporary slowdown in the market. ''From a developer's point of view, I won't say it's a deceleration in luxury home prices, but I assure you that in a changing environment it's just a matter of supply and demand,'' says Al Marri. ''If demand increases, the prices will rise and vice versa.'' However, he acknowledges that premium and luxury projects may witness some deceleration compared to the average market value, but developers may consider ''margins from 10-20 per cent as viable''.
''Residential developers are taking their housing projects to new heights,'' says Al Marri. ''A luxury real estate won't diminish as people are in search of a luxury lifestyle. These renowned residences will continue to attract homeowners who are looking for unparalleled quality and stylish furnishings.''
With the government monitoring the market, there is a possibility of fresh measures being implemented sooner than later. The International Monetary Fund (IMF) had recently warned the government of a possible build-up in speculative demand in Dubai's residential market.
It emphasised a need for ''further policy action if real estate prices continue to increase rapidly'' and for ''additional fees for reselling properties within a relatively short time to discourage speculative demand.''
''Recent residential sales price increases of between 20 per cent and 30 per cent year-on-year in Dubai were not sustainable and indeed were recently flagged by the IMF, which identified the risk of unsustainable price dynamics in Dubai's residential sector,'' says Martin Cooper, Director of Real Estate at Deloitte Corporate Finance.
He says it is likely the slowing of residential sales price growth in Dubai has also been driven by the market, with buyers unwilling to pay some of the most recent asking prices in Dubai.
Most experts anticipate prices to continue to slow down over the remainder of the year, as more cooling measures are deployed.
''I expect this trend to continue, certainly during the summer months and the subsequent holidays, but this is just a cooling-off period, a time for the market to catch its breath,'' says Volpi.
He adds that house prices will achieve a positive growth in the medium to long term.
Many experts believe Dubai's residential property market is much more mature now than it was in 2008-09, and that the current slowdown will act as a buffer to avoid a possible bubble burst.
''The cooling off of price increases is a positive sign for this maturing market,'' says Garrett. ''It shows that the government is taking the right steps to avoid another bubble and give confidence to people looking to invest in property.
''It would have been unsustainable for the market to continue on the same growth trajectory.
Source: Syed Ameen Kader, Special to Property Weekly