The challenges first-time homeowners face in Dubai has been the cause of some concern over the past couple of years, amid an economic slowdown, job insecurity, low wage growth, demographic mix, tighter lending standards among banks, and general doubts that millennials want to buy a home in the first place.
Even as survey after survey indicates that they do, there has been much hand wringing among the analyst community, suggesting that the transition from an investor-dominated market to an end user one will be much more protracted than initially estimated. It is the nature of this concern that needs to be scrutinised to determine what lies in store.
Using the US housing market by way of comparison, the Urban Institute released data showing that there were 1.3 million first-time home buyers in 2001, a figure that declined to 800,000 in 2011 as the aftermath of the financial crisis kept reverberating throughout the economy. By 2015, however, the number had bounced back to 1.3 million again, despite (or perhaps contributing to) the rise in home prices to well beyond the levels seen in 2001. And in many cases, even beyond 2007’s numbers when the crisis hit.
In the US, however, data suggests that repeat home buyers (the ones who move up the housing curve, using equity accumulated from their first purchase) had declined by more than 30 per cent since 2001. This indicated that first-time buyers were far less price sensitive in their decision-making than repeat home buyers, with the latter opting to remodel their homes.
Perhaps even more critical was the fact that first-time home buyers’ purchases was in the price region of $250,000-$350,000 (Dh918,237-Dh1.2 million).
These trends indicate that in the US, the market has remained well supplied in the price bracket that attracts first-time buyers, but has a void in the price curve that allows buyers to move up the housing curve. Indeed, there is a considerable gap in the national housing market as developers have continued to supply at the luxury end, thereby ignoring a vital component of the demand curve.
In Dubai, data indicates that at the initiation of freehold, developers were eager to cater to first-time buyers, However, as prices ratcheted higher in response to overwhelming demand, developers quickly moved up the price curve, catering to the luxury end. Only recently have there emerged signs that developers have started to move in the other direction by “re-setting” prices. In the process, they’ve created suburban communities that while do not possess attractive non-price features, incentivising first-time buyers (such as schools, community centres, restaurants, etc), have masterplanned communities that will include such features in the years to come. This trend of “suburbia” as well as the resetting of prices has come amid a general tightening of lending standards (for the most part, post-handover payment plans have not yet been offered in this price point yet), and consequently has kept first-time buyers on the fence.
Paradoxically perhaps, even as there is general recognition that the mid-income space has been inadequately catered to even as latent demand exists, the supply pipeline is likely to extend timelines, and even contract during this cycle as developers adjust. This implies from a macro perspective, the structure of the Dubai housing market will remain lopsided in favour of luxury.
Only as developers adjust to the “new normal” of lower margins and less reliance on off-plan sales to finance their projects, will first-time buyers trigger the decision to purchase as currently announced suburban communities start to mature. Meanwhile, given the fact that the upper end of the market remains well supplied (and has attracted end user ownership), a lack of price growth implies that there will be a lower velocity of purchases of the repeat homebuyer.
Instead there will be a preference for remodelling their homes. Evidence of this has already started to show up in the data in Dubai, further adding to the sluggishness being experienced in this segment.
The evolution of home ownership is always a slow moving variable. In Dubai, contrary to the US, first principles remain the challenge to incentivise the first-time buyer. Happily, developers have started to move in this direction, and it is only the perseverance of this trend that will build inventory at the median income level and therefore contribute to the maturation of the market.
For developers, investors and end users alike, the variable to focus on remains price and visibility of completion. It is the confluence of these two factors that will undo the paradox of affordable housing and lead to a housing balance.
—The writer is the Managing Director of Global Capital Partners.