Locations such as Town Square, Mudon and Remraam will likely emerge as 'hotbeds' for transactional activity. (Image for illustration purpose only.) Image Credit: Supplied

In 2021, one of the defining factors that helped boost the performance of the Dubai real estate market was historically low-interest rates. Mortgage buyers were in an excellent position where they could afford to stretch their budgets a bit for a property that they really wanted.

With interest rates rising following rates hikes by the US Fed, the nature of the activity in the market is bound to change. Buyers who were on the fence at the start of the year will now be in a rush to buy while they can still lock in a good mortgage rate. We will be seeing a healthy level of demand over the next few months, particularly for higher-end properties.

As we head into the second-half of the year – with a few more interest rate hikes on the horizon - there will be a significant shift in the demand structure and in pricing with the ultimate effect being one of stability.

Three tier effect

The demand in the property market can roughly be divided into three tiers – below Dh7 million, between Dh7 million and Dh10 million, and above Dh10 million.

The last tier is one that will remain mostly unaffected by the recent changes. The number of cash buyers enquiring at the Dh10 million-plus level outweighs the number of mortgage buyers, and that ratio increases as the price point go higher. We will see a small drop in the overall number of inquiries in this space, as the cost of financing will be quite steep – this does provide an excellent opportunity for cash buyers to make up the shortfall.

Realistically, the prime and super-prime segment will continue to have a strong performance over the rest of the year, much in the same vein that it has so far. The effects of rising interest rates will be more noticeable in the other two tiers, with a gradual downward shift in terms of search criteria and the type of demand.

When interest rates are low and a good mortgage is easy to secure, a buyer with a budget of Dh8 million could stretch a bit further and try to aim for a higher price bracket. As interest rates go up, the gulf between the tiers grows wider.

Most families are searching in the range of Dh2 million to Dh10 million with the vast majority looking at home finance options. This in turn drives buyers towards homes in lower price brackets. The type of people who would normally buy in an area like Arabian Ranches or Jumeirah Golf Estates will be looking for the next best thing that ticks the essential boxes and is easier for them to secure.

I predict that the lowest tier – below Dh7 million – will see a huge surge in demand later in the year as affordable luxury becomes the order of the day.

Stabilising supply-demand

The ironic upshot of all this is that the most affordably priced areas will see prices go up a bit due to the increase in demand – communities like Town Square, Mudon, and Remraam are already quite popular among families and are poised to become hotbeds of transactional activity. The availability of stock will help to balance out the demand and ensure that prices don’t rise too steeply.

Properties that fall within the Dh7 million to Dh10 million range will start to see stabilisation in prices as demand at that price point softens. At the higher luxury end, pricing is expected to follow the same trend – there is still a shortage of supply in comparison to the demand levels, even with mortgage buyers falling out of this bracket.

The fact is that even though mortgage rates are higher than they were at this point in 2021, they are still lower than they have been in the past, at least for now. The market will restructure itself as a reaction to recent changes and the upward pressure on prices will ease off, leading to stabilization over the medium term.