Rental costs are the key reason to buy in Dubai

Let us take a concrete example here, and homes in the Meadows are made of the stuff.

Say you buy a typical five-bed villa for $700,000 and take-up an 80% interest-only mortgage at 6% over 15 years, this gives you a monthly mortgage repayment of roughly $2,500, plus you will have $165 in service charge and municipal tax of around $160, making a total of $2,825.

Of course you have to find your $140,000 down payment, which would cost around $700 per month to borrow, or say $580 in lost interest if you had kept that money on time deposit in a Citibank account. In total then the cost of buying per month is $3,405 to $3,525, or $205,000 to $210,000 over five years.

$250,000 in rent

Now if you were renting the same villa the rental cost would be around $50,000 or $4,167 per month. Consider then the cost of renting over a five-year period. You would pay out $250,000, if rents do not rise which after 30% plus this year is quite an assumption.

This example excludes capital repayments. The same mortgage with capital repayed over the period of the loan would cost $2,225 a month more. After five years you would have paid $133,500 in capital repayments and have accumulated this capital as equity in the property.

What about a fall in house prices? Clearly if villa prices fell significantly in the five-year period then you would be no better off than if you paid rent over this period. But the saving on rent is a cushion to a limited extent against falling prices.

But is it not more likely that in a dynamic economy like Dubai that a more optimistic scenario will emerge after five years, whatever the ups and downs of the local economy? It might be that rents continue to rise, and that house prices also increase at least for some of these years.

Inflation helps cut debt

There is also the impact of inflation to consider on buying a fixed asset like a house. When inflation rises costs go up for consumers, and eventually salaries just have to follow. The overall level of prices and salaries therefore goes up.

However, your debt is fixed at today's prices. Thus as inflation accelerates the debt falls in real terms - as every other cost rises while debt is fixed.

Of course, this may also push up interest rates and cause monthly payments on a mortgage to rise. But then again Dubai mortgage rates are presently high by comparison to US dollar mortgages, and this gap should narrow as the market develops.

In short, seeing a house as a saving's policy and an investment in the future of Dubai, quite apart from providing a roof over your head is a sensible approach. And it is the phenomenal expenditure on rent that is the best reason to buy in Dubai, not any assumption about capital growth.

Interestingly in most global real estate markets it is the other way around: people buy for capital growth and not to save on rent - indeed it always costs more to buy than rent - and that is a sign that these markets do not offer great prospects to buyers. Dubai property, on the contrary, is relatively cheap.

Oversupply and prices

One final caveat, if the Dubai real estate market suffered from chronic oversupply and prices plummeted to more than 50% of current valuations then this argument would not stack up. It would then be better to rent in anticipation of a crash.

However, Arab property investors have a tendency to sit tight in a downturn, and are not usually highly leveraged as in other global markets, and so can afford to ride out the downturns. This produces an unusual kind of property market in which buildings can stand empty without impacting on property prices.

Again in such a market paying down a mortgage with money saved on rents is a sensible approach to the cost of living in Dubai. Perhaps expatriates sitting on the sidelines waiting for a crash will still be there in five years time, while today's owners will have paid down a large chunk of their mortgage.