Mortgage rates are treading higher, and the question is whether this price out genuine end-users? Image Credit: Supplied

As interest rates rise in an environment where mortgages are flourishing, the impact on the housing market becomes more unpredictable as monthly payments start to rise steeply following the end of the fixed term period.

The data post-pandemic reveals that applications for mortgages have soared (which makes sense given the resurgence of housing prices), but equally, as the ‘fixed term’ period expires (typically two to three years), the monthly outflows threaten to eat into household budgets. For some, rising house prices has meant that they have been able to exit investments prior to the end of the fixed-term period of rates, but for end-users, as well as long term investors, the duration bet (prices will continue to rise over the longer term) becomes the predominant one.

One of the consequences of the expiry of the fixed-term period in mortgages is that the amount of inventory available for sale increases in the secondary markets. This is a phenomena that we have seen play out in recent months, as investors have cashed in on rising home values (in many cases being replaced by new buyers starting off with new fixed-term periods).

However, as interest rates have continued to rise, uncertainty about the future direction have meant the housing market continues to rely on payment plans in the mid-income space, even as developers have tilted their focus towards the luxury segment to cater to the surge in demand from overseas buyers. As a result, the gap between primary and secondary market prices of comparable neighborhoods has widened again, with primary market offerings trading at double-digit premiums, especially in the apartment space.

Pricing in inflation

This is buttressed by the fact developers continue to offer generous payment plans in this segment, and therefore give buyers the comfort of planning their outflows with certainty. However, inflation continues to add uncertainty in the calculus, resulting in the inevitable outcome of price growth slowing as well as demand moderating. This trend will likely continue in the medium term as the trajectory of future interest rates continues to move higher.

The silver lining here is that the rate of new inventory being added is reducing, which implies that supply ‘overhang’ will not be a factor accentuating the moderation of price trends. In certain segments, prices have already started to fall, as the impact of the increased rate hikes starts to filter its way through the economy.

Price wobbles, there will be

What this means for the investor and end-user is a re-emphasis of what is already known. Real estate purchases (just like capital market investments) are long-term forays by their very nature, and short-term wobbliness in prices are part and parcel of the game. Rising rental rates in tandem with rising EMI payments makes the decision for potential buyers a tenuous one to commit, and often other factors come into play into the decision-making.

In Dubai, recent commentary by analysts suggest that the trajectory of prices remain probabilistically skewed towards the upside (especially since data reveals that household prices have not yet surpassed their previous peaks seen in 2014). Whilst this is a problematic argument for many reasons (not the least of it being that prices were even higher in 2008 but for the most part were no recorded accurately), the overarching theme is that asset price volatility historically rises in times of rising interest rates. For the astute investor, these represent opportunities rather than concerns. For the end-user, the deciding factor is ‘qualia’ related (as it was historically until about 2002), before the onset of the speculative mindset that set in around the time interest rates first went to near zero levels. In the final analysis, any price correction is an opportunity, more so in an inflationary environment as replacement values move steadily higher.

Sameer Lakhani

The writer is Managing Director of Global Capital Partners.