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Transactions in the emirate fell by 4% in the third quarter, as the blended average house price dropped to Dhs951 per sq ft, down from Dhs1,015 per sq ft in the second quarter.
'After a period of stable prices we are beginning to witness a shallow but lengthening slide in overall average prices," said Ian Albert, regional director at Colliers International.
'Despite some improvements in loan to value ratios and interest rates, lenders, the banks and financial institutions remain committed to a conservative lending policy typified by greater due diligence in the lending criteria."
Colliers says the return of Tamweel, one of the emirate's largest lenders, could help boost the monetary supply and encourage buyers back to the market, but notes that predicting the level of improvement is difficult because the mortgage firm's plans are unknown.
Price-to-rent ratio falls
About 33,000 new homes are expected to be delivered to the Dubai market by the end of 2010, Colliers projects, down from its previous estimate of 41,000.
"The market conditions remain good for tenants who are benefiting from falling prices, and therefore rents, but painful for investors, who are seeing their potential income generation squeezed by the skewed demand-supply dynamic," Albert said.
Colliers said the price-to-rent ratio in Dubai has fallen to 1.23, down from 1.56 at the peak of the emirate's real estate boom. The ratio can help identify when house prices deviate from their average, or their fundamental value, indicating either a potential bubble or undervaluing of real estate, the report said.
"In Q3 2010, the ratio stood at 1.31, 6.4% higher than its long run average. It is envisaged that house prices may fall at a much larger rate than 6.4% as further declines in rental values are expected, which will exert a larger downward press on prices," Albert said.
By comparison, the price-to-rent ratio in the US is currently 1.021, 4% higher, than its long run average of 0.99, despite the downturn in the market. In the UK, the ratio stands at 1.22, against its long run average of 0.94, indicating that house prices in the UK are 29% overvalued. In Hong Kong, where the real estate market is growing, the PRR ratio is 50% higher than its long run average of 1.06.
'The indicators confirm the existing trend within the Dubai market. First we had the severe boom and bust of 2008/9 where the market was characterized by extreme price fluctuations. Then, after the severe correction, the market stabilized and now, it would appear, we are witnessing a slow but protracted decline in asset values.
This reflects the reality on the ground as occupancy rates fall to 80% and the market is unable to absorb the additional supply without a growth in the population or a slowdown in the release of stock,' Albert said.
Jeff Florian, Senior Reporter
