Dubai Housing Market Heading Towards An Unsuccessful Start

Residential sales market of Dubai is going to be softer as the year grows; according to a new residential research note. Currently the market is undergoing a false start. The sale prices of the apartment are declined nominally for this quarter and volume will be increased which can be mistaken by the forthcoming recovery, but the fundamentals of the market won’t support this in the short term.

Over the past year, the cost of debt has increased and will continue to rise with the rise of interest rates of federal open market committee this year. Recent stability signs for apartment sale price is not sustainable because ret prices will continue to go down. If these both don’t match, then the yields erode without justification in the current market. Moreover, the cost of debt is increasing which should push yields up and the demands low, thereby pushing the prices down.

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In the first quarter of this year, apartment leasing rates went down by 2.5% while the sale prices declined by 0.5%. Lease rates for single family homes (SFH), also known as villas, decreased by 2.9% and sales price with 5.4%.

Rents will go on declining because of weak demand and changes in the housing budgets. This will impact on high income housing. The decline in rent is due to regional economic stagnation & reiteration, poor job growth and moderate supply growth in Dubai.

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Dubai’s business prospects are linked with regional economic performance and are stable, Dubai being the regional hub which restricts the short term growth potential for businesses thereby impacting job growth and demand for housing. Meanwhile the risk appetite is still tempered & increasing rates of interest must push up return expectations so that the investors stay different and expect more.

Short-term capital inflows, particularly foreign investment from main countries like India, Pakistan, can push up the number, but it will likely to be a temporary trend with nominal effect.

In first quarter, Dubai’s Real Estate Investment Demand Index (REIDI) went down by 20.4% compared to last year, driven by fluctuations in exchange rate and decreasing revisions in GDP predictions. The US dollar, in the very same quarter, and the UAE dirham got strong against 9 out of 14 floating currencies included in the REIDI, compared to last quarter of 2016.

To have yield erosion in between of rising debt cost and liquidity constraints is unsustainable. As interest rates rises, banks will likely impose strict lending standards, residential volume and prices should decrease.

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