Standard Chartered: UAE economy supporting Dubai house prices

The latest 'Middle East Focus' from Standard Chartered Bank includes a raised UAE forecast for real GDP growth of 10.2 per cent for 2006 due partly to an 11 per cent expansion in the oil sector with significant new oil production facilities and higher prices, and a 20 per cent increase in government spending.

Standard Chartered points to the emergence of $100 billion of mega projects in Abu Dhabi over the past year, and a sharp increase in salaries for the public sector as more than enough to offset the impact of the UAE stock market crashes in 2006. Indeed, the main problem for the economy is still a high level of inflation because of high growth, not a slowdown.

Given that the UAE's interest rates are pegged to the US dollar, this implies a negative real interest rate. The IMF forecast for inflation in 2005 was eight per cent, but that did not include 30.1 per cent residential rent rises comparing the first quarter of 2006 with the same three months in 2005.

Negative real interest rates

Negative real interest rates in an economy make real estate a strong buy as debt taken to buy a property is eroding in real terms while the equity value is being increased by inflation. In short, debt shrinks and housing equity grows in this environment.

Besides as Standard Chartered economists Steve Brice and Monica Malik pointed out at a presentation to journalists this week, Dubai property is still attractively priced in absolute and relative terms by comparison to similar hub cities around the world, with rental yields very high in global terms. They also noted that a seven per cent population growth demographic in the UAE was more than enough to soak up the increasing supply of property.

Government role

Mr. Brice also repeated his argument from earlier this year about the likely response of developers to any market downturn in Dubai. Essentially, he contends that government involvement in the sector is so high that developers would simply hold vacant property and not dump it on to the market, thus keeping prices higher than they would be in a more open market.

He admits that this policy also has a downside in that a period of weakness in the real estate market would be longer than in the totally free market situation. But on the other hand, for people taking out a long-term mortgage this is an additional security that they will find valuable.

It has to be said that the UAE's economic fundamentals thus seem particularly supportive of the real estate sector, and only the most dramatic of oil price crashes could seriously challenge this outlook. This is why Standard Chartered Bank's respected economic team does not think a real property crash is likely, although a soggy patch for sales is possible at some stage.