A combination of falling UK house prices, the
devaluation of the pound sterling and another strong year for Dubai
property could result in the previously unthinkable before the end of
the year: homes in the UAE worth more per square metre than homes in
the UK. It looks a landmark year for UAE real estate.
Indeed, the divergence in outlook between the UK and
UAE
property sectors for 2008 could hardly be more vivid. In the UAE, high
economic growth rates fuelled by a five-year surge in oil and gas
prices is being inflated further by a currency and interest rate regime
pegged to the US dollar; and as the Fed cuts rates in the US home loans
will also cost less in the emirates.
For local property this means cheap finance is available to buyers
whose only alternative is to pay inflated annual rents. One study put
the cost of renting a one-bedroom apartment at Dhs10,000 per month
compared with Dhs7,500 to buy.
In this atmosphere further increases in house prices look
inevitable, with 10-20% appearing a conservative estimate for 2008. And
at the same time the
UAE
mortgage sector is only just really opening for business. EFG Hermes
estimates the local mortgage market is presently worth a tiny Dhs16bn
and could grow 10-fold over the next five years; and the availability
of finance will definitely be a factor in local house prices.
Falling mortgage costs
There is indeed mounting pressure on
Emirates mortgage providers to lower their interest rates. Currently
market rates stand around 7.5% whereas the newest market entrant
Commercial Bank of Dubai offers risk-assessed home loans from a little
over 5% to customers with the best credit profiles.
Market competition among the 23 lenders should mean that local home
loan rates go lower this year, with US interest rates set to fall
further and the dirham’s peg to the dollar still firmly in place.
By contrast in the UK a 10-year housing bubble has just burst
courtesy of the credit crunch that started last August, and caused the
first run on a UK bank for more than a century. Mortgage conditions are
now tougher for borrowers, rates have risen and transactions have
fallen steeply. House price have been falling for the past four months.
UK boom over
Many economists have pointed out that on any
valuation technique UK house prices have become overvalued by anything
from 20-50%. In a market correction it is normal for prices to move to
an over-correction before reverting to the long term average.
This is the main reason for expecting the gap between
UAE and UK house prices to close in 2008: prices stand to fall sharply in the UK while in the
UAE house prices still have a lot of upside.
However, there is one final factor that will close the gap:
currency devaluation in the UK. The pound sterling has been riding high
against the US dollar – due to the well known problems of the US
economy – and has therefore made dirham-denominated property cheap in
the UK and UK property that much more valuable in dirham terms.
Now that the UK economy faces a series of challenges not unlike
those in the US and the pound sterling has fallen in value below two
dollars to the pound. HSBC predicts a decline to 1.75 over the next 15
months as the pound devalues to offset the impact of a UK slowdown or
recession.
Devaluation bonus
For UK owners of
UAE property that will provide a nice gain in value in sterling terms. But at the same time the price differential between UK and
UAE real estate will be eroded in dirham terms.
For instance, take the Dhs5.7m price of a five-bedroom villa in New
Dubai. To obtain a house of similar size in the UK Home Counties might
cost around Dhs9m today. Now factor in a 10% rise in Dubai prices to
Dhs6.3m and a 20% decline in UK house prices bringing the comparable
home to Dhs7.2m. Then adjust for a fall in the value of the pound
sterling and you have cheaper homes in the UK than the emirates.
This is a remarkable phenomenon: When Dubai house sales to
foreigners first started in spring 2002 prices were at around a quarter
of comparable UK prices in the Home Counties. A little more than five
years later and the tables are set to turn.
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