Will Dubai house prices continue to increase?

The Dubai freehold property market is just over two years' old, and no official statistics on prices exist yet. But if you compare original sale prices with re-sales, a clear upward trend in prices is discernable with an average increase in the range of 10-15%.

In such an immature market predictions about the future are more difficult, though not necessarily more or less accurate than those in developing markets where interested parties often try to spin the statistical picture in a rosy direction.

One old canard in the young Dubai market is an alleged imbalance of supply and demand. Let us be quite clear, at this moment in time there is a shortage of property in the market for occupation and for sale.

Around 10,000 units per annum are coming on to the Dubai market to meet a demand for some 30,000 units, say independent consultants.

So where does that leave prices? In comparison to Singapore, Dubai house prices are very cheap at roughly half-price, although rental costs are similar. Why should Dubai property be sold at a 50% discount to Singapore price levels, if rents are the same?

Two main reasons: first there is no freehold property law in Dubai yet. This understandably restricts demand to those bold enough to risk an investment based on the word of the Dubai Government that it intends to clarify the legality of their ownership.

The second reason for low prices is linked to the legal position. Mortgage lending is restricted in Dubai to a number of local financial institutions, aside from HSBC for an even more limited selection of projects. Lenders are also put off by the legal situation.

This means that property finance is more expensive than in comparable markets. And even for cash buyers - who dominate the new Dubai freehold market - this is the benchmark that they work from in assessing property values.

Now once a new Dubai Property Law is on the statute book, a new wave of buyers will emerge, and at the same time a new wave of lenders will join the market.

The arrival of new mortgage lenders will increase competition and so reduce the cost of borrowing and also boost the total amount of money available for investment in the property market.

Both factors will tend to push house prices in the direction of Singapore, i.e. upwards. Now there are forces working in the other direction to consider.

US interest rates look on an upward path. But the lending rate for US dollar loans on housing is around 3.5% compared with 6.5% in Dubai, and the gap between these rates gives Dubai a fair margin to absorb some of the rise in US rates into the existing mortgage rate in a more competitive lending market.

For it is important to remember that US and UAE interest rates are linked - and the long-term stability and low-cost of US housing funds should be another bull factor for Dubai property.

Overall, it looks most probable that Dubai property valuations will continue to move ahead even if there are problems in global property markets due to higher US interest rates. Another important point to note is that Dubai property is very cheap in global terms and is still in the phase of adjustment to global levels.

The Dubai economy is also a hub for the Middle East whose economic fortunes are inversely related to the major industrialized economies. Only when the Middle East's present boom begins to unwind should Dubai house prices start to falter.