In the current Dubai housing market, what’s obvious is that home buyers need to wait longer for their investments to pay off than they would have before the pandemic. This is not only due to prices having risen, but because of the cost of mortgages spiking. While rents have risen, home prices have risen much more, especially villas.
The increased cost to buy a home means that the time it takes to breakeven compared to what one would have to pay to rent a comparable home has gotten longer. (The analysis assumes that the breakeven point is when the estimated net costs of having owned the home match the estimated costs of having rented the same home over the same period).
In Jumeirah Park, for example, a person buying a median-priced home by putting down a 20 per cent cash with a 25-year 5 per cent fixed mortgage would not be able to sell the home and break-even for an estimated 11.2 years. That is up by more than 33 per cent from before the pandemic. For mid-priced areas like Majan, Dubai South and JVC, the breakeven time reduces dramatically to less than six years.
Stand to lose
This implies home buyers who sell early stand to lose substantially, even more so for buyers who haven’t purchased in areas that are still attractive by this metric. What this implies is something we are starting to witness; a steady move towards areas that have not risen by as much, including to outlier areas like Dubai South and Liwan 2.
This analysis assumes that rates stay at 5 per cent, which is unlikely given the trajectory of interest rates, and breakeven rates will elongate further stretching budgets in areas where prices have risen the most. The analysis gets more nuanced when the opportunity costs of investing in the capital markets are factored in, especially with an emphasis on high dividend yielding stocks. (This can be offset by the post-handover payment plan phenomenon in the standard ‘discounted cashflow model’).
For the most part, it reinforces the conclusions that have already been arrived at. What does this all mean for homeowners and prospective buyers in Dubai? Firstly, the obvious: the blistering pace of price rises in the villa segment is likely to moderate and, in some cases, even revert as the ‘post-pandemic buyer’ grapples with inflation and moves towards more affordable condominium-type purchases.
Looking beyond market trends
Looking at historical price cycles, periods of excess are normally corrected as capital is constantly being reallocated. Immerse yourself in the world of numerical analysis, and your sense of the world shifts. Often the commonplace is unveiled to be miraculous.
The ‘chasing the market trend’ phenomenon naturally invites regression to the mean and opens a new window of opportunities for those that remain patient. Generation after generation, historians are warned by their peers to steer clear of the term ceterus paribus (other things being equal), lest it contaminates the objectivity they are optimistically assumed to bring to their subject. Yet, generation after generation, they have been ignored by the strongest of their craft, because other things never remain equal.
A large part of the spigots that have opened up have been on account of geopolitical forces (which has been the case for Dubai), but these forces ebb and flow. Wealth creation over the long term (ignoring the parts of history where credit has been essentially free) has always been done systematically over time by waiting for what seems like an eternity.
Guiding the first-time buyer
In the current environment, where the zeitgeist has been dominated by the villa space and the upmarket segment, price chasing has stretched breakeven points to levels beyond reason, implying that the money to be made lies in other areas. For the small investor buying a first home or making a downpayment on that first real estate investment, this simple metric of breakeven remains the best compass by which to navigate and drown out the cacophony of follow-the-herd mentality.
Troubled times always summon historians to the fray. For most, history writing and history-making are divisible forces, but for the sensible investor, they do not have to be.
It turns out then that our financial future has never been more urgently needed the voice of those, who, in less interesting times, might settle for the same communion with the distant ghosts of simple statistical analysis. One can always summon the exogenous forces and indulge in the macro analysis if one is willing to tolerate the stomach-churning volatility that comes along with the package.