Business | Property
Abu Dhabi rent cap 'will cool inflation'
Abu Dhabi's seven per cent rent increase cap will bring inflation down sharply, but it could prevent the housing market mechanism from working, experts said yesterday.
- By Stanley Carvalho, Staff Reporter
- Published: 00:00 November 8, 2006
Abu Dhabi: Abu Dhabi's seven per cent rent increase cap will bring inflation down sharply, but it could prevent the housing market mechanism from working, experts said yesterday.
However, the measure will help cool the heated residential rental market in the short term, benefiting consumers and the economy, so long as it is strictly enforced, they added.
"This means that inflation in 2007 in Abu Dhabi will now fall more sharply than expected," said Steve Brice, Regional Head of Research at Standard Chartered Bank.
"We had expected inflation to fall to 9.6 per cent in 2007, but the revision to our Abu Dhabi rent increase assumption means a sharper fall to 7.3 per cent is now likely."
Rents for residential accommodation have been rising 10 to 30 per cent annually over the past year in Abu Dhabi and anxious residents, especially in the low and mid-income sectors have been calling for a cap on rent increases.
Faced with similarly sharp rent increases, the Dubai government imposed a 15 per cent rental cap in October 2005.
"Rent caps can be useful provided they work, as they can prevent a scenario where rents go up due to temporary demand pressures and then stay high once those pressures subside," said Philip Khoury, Head of Research at investment bank EFG-Hermes.
"However, such caps can hamper the market mechanism from working in that they can lead to 'rationing' in housing or un-met demand."
Furthermore, if there is low elasticity of demand to price (i.e if demand is relatively insensitive to price), then the impact of rent caps on the market mechanism is less than if there is high elasticity of demand to price, Khoury added.
Dr. Giyas Gokkent, Head of Research at National Bank of Abu Dhabi, said the move may not seem market friendly but it was nonetheless inevitable given the current scenario.
"The level of construction in Abu Dhabi is not like Dubai and new supply will come on stream in 2008-09 and hence it is the duty of the government to step in and protect consumers," he said.
While there's no doubt about the implementation of the rent increase cap, it must be done immediately and effectively.
"There may be some evidence of slippage in Dubai but the implementation has been reasonably effective and Abu Dhabi should implement it strictly," said StanChart's Brice.
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