In Dubai’s property market, affordability must have a say in 2025

It’s sometimes a fickle thing, what public memory chooses to remember.

Affordability has been a constantly recurring theme, reignited by the fires of inflation that flared in 2023. For most potential buyers, worried about their mortgage, housing remains the least affordable since 2007.

In most parts of the world, this has been because the supply side has been weak to respond to the growth in demand. And despite the increase in mortgage rates in the last two years, there has not been enough of an effect to knock prices off their high perch by enough. (Luxury property remains the exception where prices have weakened.)

In the UAE, the narrative for the most part has been flipped over. During 2015-20, when there wasn’t much of a supply overhang, analysts fretted that the supply pipeline was the problem. Developers responded by offering an eye watering array of payment plans.

Post-Covid, as prices took off, new supply followed with a vengeance with a consequence that three years later, payment plans are even more generous than they were ever since the BNPL phenomena was introduced in real estate.

Across financial markets, prices for different assets, adjusted for risk, should converge. Otherwise, landlords could lock in their profit and switch to higher returns in the capital markets. To be sure, we have seen this phenomena occur.

Yet, the demand for housing remains insatiable, especially as developers have become financiers, making cash flow the new affordability criteria. Across the UAE, the gap between offplan and ready prices have widened as a result, and sales of offplan have accounted for nearly three-fourth of overall sales in 2024, up from nearly 45% in 2019.

Whereas most asset prices change almost instantly to changes in monetary prices, it takes much longer in the housing market, as it takes months if not years to sell a property. Owners and investors of existing homes have responded by refurbishing older builds, and yet the gap between existing and offplan properties continue to rise.

With buyers now being spoilt for choice, even a cursory glance reveals that ready home median prices have started to fall, with offplan price levels following the same. Even as artificial methods - developers announcing ‘imminent’ price hikes - have not resonated in the market.

To be sure, this is not a repeat of past cycles, but rather suggests a more moderate path, as buyers move to the outskirts to get deals.

Prices in these areas have been quick to respond, spurred on by the surge in joint ventures between passive landlords and new developers looking to enter in a market where master-developers have cracked down on land speculation and have strict covenants on when to start and complete projects.

All of this is to suggest that for the median buyer, the monthly instalment has taken front and center in the road to buying a property. Rather than traditional valuation metrics such as replacement value, price-to-rent or price-to-income ratios. (The latter being at their lowest since 2013 according to the most recent IMF report on the UAE).

As institutional investors start becoming more cautious, we have seen a move towards reviving distressed property and an increased volume in the Emirates Auction market, as there has been another subset of buyers unable to meet their mortgage requirements.

For most people, housing remains a home. For economists it is an income-generating asset, which is how owners’ equivalent rent shows up in the inflation statistics.

Housing ownership (and broader asset ownership in general) remains the cornerstone of any long term policy for any country. And the UAE is well on its way towards achieving that goal with privatizations in the capital markets, and the housing boom in the real estate sector.

However, valuations continue to matter. And the increasing weightage being placed on the offplan sector suggests a reversion to the mean at some point, as these valuations become the central theme. For affordability to become the focal point as it has, perhaps market forces will take care of themselves and prices will give up some of their gains.

Or perhaps, government policies to encourage affordability will kick in (as with the smart rental index), forcing developers to offer lower prices. Whatever the course, affordability will be the focal point for developers and end-users in 2025 and valuations will remain at the core of this debate.

May it be heard more often.