Dubai apartment prices rebound, villa prices up by 31%

The Investment Boutique HPI is modeled on the UK's well respected Halifax House Price Index and employs a rolling three-month average to eliminate some monthly distortions to the figures. Its statisticians have, moreover, done a good job in adapting Dubai data to create a workable model.

The latest results are therefore illuminating, and confirm much of the price discussion in this column over the past year. For 2005 was indeed a tale of two markets, with villas performing substantially better than apartments.

In fact, the average price per square foot of a Dubai villa improved by 31% over the 12 month period. Thankfully the HPI was retrospectively set back to January 2005, so the annual movement is available.

Apartments rebound

But the story for apartments had a twist in the tale. According to the HPI the average price of apartments fell by 10% in the first half of 2005, and then rebounded back in the second half, to close pretty much exactly where it started.

Now one factor that ought to be considered is that the general level of inflation in Dubai during 2005 was running at 15-20%, according to the National Bank of Dubai's recent bulletin.

Hence if house prices are adjusted for inflation then apartment prices fell in real terms while, villas posted around a 10% real gain in value. On the other hand, rental prices soared by an average of 38% on Asteco's estimate, so rental yields were up.

However, both the new price data and the rental yield situation support the argument to buy rather than rent Dubai property. The nominal value of an investment has been protected in 2005, and improved in the case of villas, while the rent that would be paid to live in a comparable property has gone up substantially.

End-users dominate

Agents report that the Dubai property market has swung from being a place for speculators out for a quick dirham to becoming an end-user market with today's buyer typically being somebody who intends to live in a property, possibly for quite a long time.

It is not hard to see why. Rent rises in Dubai may have been capped at 15% for 2006, but this is still a lot on top of the 2005 surge in rental costs. Many longer-term residents are sitting down with a calculator to work out the total cost of buying and deciding that buying does make sense.

The HPI does not predict the future, but it does at least give a solid indicator of the recent past, and is not based on industry gossip but an accumulation of hard sales data. And if the pattern that has just been published continues into 2006 then we could see further support for nominal house prices, and even an improvement in popular locations and villas, which rather confounds doomsters who hope for a price collapse.

For with high general inflation nominal house prices may stay steady while the cost of everything else goes up considerably, though eventually property will move to catch up.