Will Dubai’s ready homes finally close price gap with offplan?

Back in the 18th century, David Hume raised the problem of induction, which basically stated that all of our reasoning is based on the assumption the future is likely to be similar to the past. If asset bubbles formed and subsequently led to a collapse - creating a price output dislocation every time in the past - then it would likely happen again.

It is interesting to note that whilst there have been an increasing probability of a price and rental correction in the Dubai property market in the last year, the commentary shifted decisively after the Fitch report, with most analysts stating that a ‘moderation’ was now imminent.

Subsequent data on rentals in most areas as well as price drops in some seem to have confirmed the feeling that, probabilistically, price movements are likely to be lower rather than higher for the next year.

Rental volumes as well as values have started to drop in a few key areas, albeit in single digits in most cases as newer units come on stream, suggesting that prices may soon follow suit. (In the offplan segment, as well as in certain ready markets, there already seems to be a correction underway).  

Despite that, there seems to be this counter narrative - backed by the blistering pace of launches - that markets are still headed higher. A market that is dominated by offplan sales by as much as 75:25, and where the average offplan price is between 40%-80% higher than the ready market. Tthis trend has reversed in the US, where after years of froth, the ready market now commands a premium to offplan).

In a city that is targeting to increase its population by 50% by 2040, it stands to reason that there will be a preponderance of new launches. But the real variable to focus on is the widening disparity between ready and offplan values, and even more so the disparity between these prices and what their ‘replacement value’ is.

It comes as little surprise that the markets have as of yet not adopted this narrative as yet. History suggests that markets will be content to act as the ‘conventional wisdom processor’ (markets of course are narrations) until the time when it becomes blindingly obvious that it cannot.

Hence the lag between the point of a bubble and when they eventually prick. The longer this period is, the larger will be the displacement of prices. But we can already see the effects on rental prices, as the resident population starts to regain pricing power.

Purchases, which were predominantly for foreign non-resident citizens, have had to deal with a declining US dollar (now down nearly 13% this year). As the shift moves towards the ready market (along with democratisation of purchase values via tokenisation), there is a growing sense that prices will no longer move in a straight line.

Rather, the focus will shift towards mid-market and in increased discounting, which will further lead to delays as private credit flows start to dry up (as they have in Germany). Markets, however, are second order engines, and the fact that they have not yet discounted this probability is perhaps the glaring flaw in the argument.

John Maynard Keynes said it best when he stated: “We devote our intelligences to anticipating what average opinion expects the average opinion to be”.

Average opinion has indeed started to shift - it will shift further. The arguments have already shifted to how much of the supply pipeline will actually be realized, as if that is a good thing for investors to invest in delayed projects.

But the axiom of Hume (backed by Bayesian probability) remains clear: valuation criteria as well as empiricism suggests that we have already peaked in the price cycle. And are in for a period of turbulence. This is music to the ears for the patient investor.