Dubai house prices slide 4% in Q2, says Colliers

Despite the second quarter decline, the index still shows a 7% increase in overall house price values year-on-year from Q2 2009 to Q2 2010. However, Colliers says the new supply entering the market and declining rental incomes are likely to put downward pressure on house prices moving forward.

"We anticipate a further slowdown and we have an ongoing concern of the new supply entering the market, which will further impede recovery," said Ian Albert, a regional director at Colliers.

Colliers estimates that around 33,000 new homes will be available by the end of 2010, which is down from its previous forecast of 41,000 units due to project delays and rescheduling of completion dates. Nevertheless, the number of new properties coming online is significant given the current oversupply in the market.

"There are already more than 340,000 residential properties in Dubai with an average occupancy rate of 87%, with further declines anticipated," Albert said. "The market simply cannot absorb the additional supply unless the population grows and/or the release of stock is slowed down."

Home prices have fallen more than 50% in Dubai since mid-2008, as the credit crisis curbed financing for mortgages and speculative buyers fled the market. Credit Suisse recently predicted that home prices in the emirate may drop 20% further as properties under construction are completed.

Rent prices impact market

Colliers said the situation in Dubai is compounded by dwindling rents in the emirate with Dubai's overbuilt residential market contributing to more than a 50% decline in average rental rates since 2008, discouraging ownership and further dampening demand.

"Although this is good news for tenants, a reduction in the income generation potential of a property impacts negatively on its market value, making it less attractive to investors. This will be another factor to monitor over coming quarters," said Albert.

The index, compiled using actual mortgage transaction data from a consortium of financial institutions, showed transactions increased by 15% in Q2 2010 compared to Q1 2010. Villas accounted for 49% of total transactions, while apartments and townhouses amounted to 34% and 17%, respectively.

The data from the second-quarter also showed a 5% drop in apartment prices from the first quarter, while villa values were down 3%. Townhouses saw the biggest decline, falling 8%.

As in the previous quarter, demand was driven by end-users and oriented towards established residential projects with completed infrastructure and facilities.

"Banks continue to be cautious and selective in mortgage finance. Mortgages are mainly offered on completed projects and to borrowers who pass the banks' rigid approval processes," said Albert.