US rate cuts to boost house prices in Dubai, Abu Dhabi and Hong Kong

Hong Kong residents are perhaps more used to playing their property market than people living in the Gulf, whose freedom to buy has only emerged from relatively recent market liberalisation.

They have therefore been quicker to recognise what lower interest rates mean for real estate and mortgage applications are up by 50 per cent; and to be fair the Hong Kong banks have also been much quicker to adjust mortgage products to take advantage of low interest rates.

House price inflation

But lower finance costs ripple across the whole property development chain from land prices right through to secondary sales. If it is cheaper to finance development then profits are bigger. If home finance costs are falling, and look likely to fall further, then more buyers will enter the market.

It is an upward price spiral or house price inflation that will result. Tight supply conditions obviously help to exacerbate this market driver, and completed property in cities like Hong Kong, Dubai and Abu Dhabi is in painfully short supply.

A cursory check of the website
albabworld.com reveals just three villas listed in The Meadows, for example, compared with 20 a few months ago; and just two one-bedroom apartments in The Greens. It is the same in less popular Dubai locations.

At the same time the exit of local investors from the stock market after the extreme volatility of last week will likely produce a new wave of property investors. This phenomenon happened when the stock market crashed in 2006, and is simply a function of money looking for yield.

Rental yields are still very good in Dubai, particularly when compared with interest on cash deposits after the interest rate cuts of last week which the UAE central bank immediately passed on to local savers.

Finding yield

The smart money will therefore head into property, driving prices higher and yields down to something closer to the cost of finance, or interest rates.

It was the slashing of interest rates in the US after the bursting of the dot-com bubble in 2000-1 that sent the US housing market into a bubble. Now that bubble has burst and lower US rates are needed to keep property owners their afloat.

This time it will be other isolated pockets of real estate around the world that see their prices inflated by low interest rates. And given the determination of the authorities in Hong Kong and the UAE to maintain the dollar peg at almost any cost, this outcome has an air of inevitability about it.

For local residents in these countries the buying opportunity is now and those contemplating buying a villa today may find that they can only afford a small flat if they wait until tomorrow.

See also:
UAE stock crashes refocus investors into local property
True cost of living a rising concern in Gulf
Rents set to skyrocket as property shortage bites