Upbeat view: Why buying property now in Dubai makes sense

Dubai: Working out the right time to buy a home is always hard. A small movement in the property prices can make for a big impact for buyers. Making this decision more difficult is the recent talk on property prices having softened.

Buyers are even concerned about risk of oversupply in the market with so many properties getting launched every week. Then there is talk about the new mortgage cap slowing down demand. There is always the risk of rising interest rates spoiling the party. Put these together and it explains the dilemma for a buyer today.

But the picture gets clearer once we analyse the factors a bit closely. To understand the recent price movements, we need to differentiate between the offer price and dealing price, which is the value at which the transactions are happening. The offer price can vary from being close to the dealing price or be much higher.

It all depends on the level of motivation of the seller and overall market sentiments. In the last quarter of 2013, after the announcement of Expo, the dealing and offer prices were up by 15 per cent. In the first quarter of 2014 the offer prices went up by another 15 per cent. This means a jump of 30 per cent in just a span of six months, which is steep for any market to absorb.

Buyers, thankfully, were sensible this time and did not chase the offer prices in the first quarter of 2014 and transaction activity slowed down. Then we saw the offer prices slowly coming down to more realistic levels, at or slightly above the 2013 year-end levels. The market is again becoming more active.

Dealing price vs offer price

Making conclusion on market movements solely on the offer price is an incorrect way to judge trends. It’s far more sensible to look at dealing prices, which are less volatile and far more important as a trend indicator. These prices show that the property prices are stabilising and consolidating in the first quarter of 2014.

The belief that the mortgage cap will affect property prices looks misleading as well. Agreed that mortgage cap introduced recently has its flaws — too stringent after factoring in fees and valuation difference. The cap was also introduced while the market had yet to reach its previous peak.

It is more stringent with high-value properties, which unfortunately affects the end-user, the most important segment of the property market.

But it will not stop property prices from rising eventually. Potential buyers who could not buy will be forced to rent the property, leading to more pressure on the rental market, which in turn will attract more investors.

While the mortgage cap will negatively affect the health of the property market in long run (benefiting investors at the cost of end-users), it cannot stop prices from rising eventually.

Overdone talk

Talk of excess oversupply is overdone too.

Recent launches are nowhere near completion. Supply from projects stalled during the previous boom and completed now is the only one entering the market in the next 12 months. This number is not as high as some reports suggest and most is in Dubailand, still among the most preferred locations.

The stringent requirement for developers, who are now required to shell out approximately 25 per cent of the project cost from their own pocket before the marketing, will ensure the bulk of new supply will come from handful of large developers who will have more control over supply. This will ensure a more coordinated supply entering the market, which is a big change from the earlier boom.

Even if supply was to increase in future, the cost of development and price of land is rising fast. This will ensure new homes will not be cheap.

At the same time, expect the demand for housing to keep increasing. The bulk of investments for Expo 2020 will be done from 2016, which will result in more jobs and more pressure on housing.

While rising mortgage rates can always worry finance buyers, there is no sign of that happening immediately. The US Fed has clearly mentioned that an interest rate rise is still far away, which resulted in long-term US interest rates falling across the board.

While decision on the right time to buy will never be easy, buying a house now looks like a better bet than waiting for a correction.

(The writer is the CEO of Acrohouse Properties)