The UAE housing market feels weird.
Despite interest rates having risen, transactional volumes are occurring at a torrid pace (albeit with a greater emphasis on the offplan market and skewed towards the luxury end). In markets ranging from Toronto to Los Angeles, both prices and volumes have shrunk, which is to be expected given the surge in interest rates.
Despite tight inventory levels in those markets, prices had risen to well above 6x median incomes in many of those areas, and some sort of mean reversion was inevitable. In Dubai however, this has not yet transpired, despite the fact that moderate volume reductions have been more than made up by the value of sales. And brokers and analysts continue to gush over not only the buoyancy of the market but also about continued inflows expected from markets like China.
Youngish real estate pundits espouse advice that prospective buyers should just bite the bullet and dive in. And despite the fact that they may suffer awhile, things will even themselves out when they can refinance their mortgages at lower rates in a year or so.
What are investors to make of this?
In the US and Canada, post-Covid, there has been an off the charts moment in housing prices that continued until the final months of 2022, where prices were just running away. In 2023, we have seen prices falling, but more importantly, mortgage demand falling to levels not seen since 1997, as the mathematics of 7 per cent mortgage rates start to take effect.
Curiously, the commentary by most of the analyst community seems to be tilted towards a return to a benign inflationary scenario, which will continue to bolster demand. Meanwhile, this seems to be largely a ‘leap of faith’ argument. The recent banking turmoil seems to indicate that reverberations in the housing market will continue to make themselves felt.
If we peer into history and look at a median mortgage rate of 6 per cent, then this implies that prices need to correct by between 20-25 per cent from current levels, wiping out the Covid-related gains (driven largely by the Fed’s QE program).
In Dubai, the lift in prices was off a lower base as prices had fallen to below replacement values in many instances. Nonetheless, the speed of the rise, along with recent weakening of the dollar, implies there is a downturn in prices. It is already underway in certain segments, which has been masked by the rise in offplan activity, which itself is accounted by their overall value rather than the down payment.
A relook at valuations
The ‘buy anything’ rally is largely over, which is not to say that there are not bargains available. For the most part, however, there appears to be a fall in aggregate demand that is working its way throughout the system. Valuations will swim into focus again as investors and end-users will look towards recalibrating their spending budgets.
This back-of-the-envelope calculations is largely a fool’s errand, which is why value investing is for the longer term outlook, and independent of macro variables. Interestingly, despite the torrid pace of transactions, the time to market for ready transactions to consummate has increased by more than 60 per cent, indicating that buyers have started to become more selective.
Less than asking prices
Based on sample data, the ‘negotiated’ sales transactions (especially in the ultra-prime segment) has fallen to below 90 per cent of listed prices, where earlier the reverse was true. All of this to say that sentiment is slowly changing, both as investors start looking at more cash-generating assets, as well as re-evaluating valuations.
The housing market consists of much more than developers and realtors. The entire industry encompasses building materials, mortgage providers, analysts, maintenance services, and all of this drives economic activity.
Even though funding remains well supplied, overall monetary supply activity, along with valuations, suggests that the frenzied pace will continue to moderate. For end-users, who are looking at affordability, this will be welcome news indeed.