Why it’s time to swap your rent cheques for a mortgage
Prices have continued to fall for the past six months and have been falling consistently now for almost three-and-a-half years, since peaking in mid-2014. In most parts of the UAE, property prices are now at early-2013 levels.
Price drops have been slow and gradual, with low, single-digit percentage points per quarter across most communities and segments. Rents held better than sale prices in the early parts of the decline but the reverse has been true for the past 12 to 18 months. Certainly over the past six months, rents are falling faster than sale prices.
Significant volumes of new and generally affordable stock continues to be handed over at a steady pace, though often at a slower pace than quoted. And there’s a lot more in the pipeline.
A sluggish oil sector has reduced employment and demand for rental accommodation across the region. This is felt most in Abu Dhabi but has a knock-on effect on the rest of the country. Dubai is far better diversified and far less reliant on the petrodollar, but population growth and rental demand is not keeping pace with new project handovers and the new supply is causing downward pressure on rents.
Despite regional and international political dramas, the fallout with Qatar and a Trump presidency, UAE business sentiment is quite good and improving. The local economy is humming along. Small to medium businesses are investing and taking on more staff, particularly in the tech sector. Construction and tourism continue to be strong.
GCC governments traditionally reliant upon oil revenues have reassessed spending and taken big steps towards diversification. But this will take time. They are less buoyant than they’ve been historically. Yet, driving around Dubai, anyone can see that infrastructure investment continues at breakneck speed.
Transactions are taking place. Lots in fact. But off-plan sales once again account for the bulk. This is a concern. But why are people buying off-plan in a falling market? There are several reasons:
1. The mortgage cap imposed by the UAE Central Bank which stipulates that expatriates must pay a minimum of 25 per cent deposit, plus up to seven per cent in transaction costs for completed property on their first purchase below Dh5 million, 35 per cent deposit plus costs (above Dh5 million) and 40 per cent deposit plus costs for any additional purchase. Many commentators have argued this cap has achieved specifically what it was intended to achieve: a cooling in prices and diversion away from the secondary market toward the primary market.
2. Increased competition among developers and a high volume of new project launches has resulted in aggressive low deposit and posthandover payment schemes designed to incentivise buyers. This includes subprime buyers who cannot afford to buy in the secondary market due to the much larger deposits required.
3. Popular sentiment that prices are at or very close to the bottom of the cycle and will increase in the lead-up to Expo 2020. There has been an increase in product offerings in affordable communities in the sub-Dh1 million, sub-Dh1,000 per square foot segment.
Projects handed over in 2017 or earlier were largely funded by front-ended payment schemes where the consumer generally paid more than 50 per cent during construction. But off-plan sales that have taken place in 2016 and 2017 have been a very different story.
Deposits are low while commissions remain high. Agents can earn three to four per cent on an off-plan buyers’ 10 per cent deposit.
While far better regulation now exists to ensure that progress payments are linked to construction milestones and that buyer funds are held securely in escrow, a few of these too good to be true payment plans may prove to be just that.
Yet in other parts of the market, well-located villas in some of Dubai’s most sought-after established communities are now within reach of the common man. Few global cities offer the opportunity to buy a well-built four-bedroom free-standing villa in prime location on a decent sized block with a pool for under $1.2 million. Try doing that in London, Sydney, New York, Paris, or Geneva. Good luck. But you can in Dubai.
Long-term residents are taking advantage, snapping up good deals, planting roots and swapping their rent cheques for a mortgage. The writer is CCO of propertyfinder Group. Views expressed are his own and do not reflect the newspaper’s policy.