Will there be a final price spike for Dubai real estate?

The dead calm of the Arabian summer might seem an odd point at which to contemplate a house price spike. But instead of reaching for the next cup of tea to pass the day let us get back to basics.

Real estate markets all move in cycles, on that most people would agree. The problem always is establishing exactly where on a cycle you are positioned at any point in time.

Successful investors get it right, unsuccessful ones do not, and people who want to live in their homes long-term are interested but not that bothered as they know that what goes down will go up again over the life of a mortgage.

Three-year market

Finding the Dubai property cycle is problematic because the sale of property freehold to foreigners is only just over three years' old. Before that time the market was restricted to UAE nationals and operated in a far more managed and restricted fashion, which kept prices lower than they would have been in a free market.

Thus when property first went on sale in May 2003 the starting point was close to the previously controlled market levels. This meant that prices could double or even treble in some cases before approaching fair value as measured by yardsticks like rental yields and international comparisons.

So the question to really ask is whether Dubai property is at 'fair value' now or has gone over-the-top? Looking towards places like the UK and property in Dubai still seems relatively cheap, while compared with some parts of Asia, though not Japan or Hong Kong or Shanghai for example, prices are higher.

However, in terms of rental yields Dubai property offers one of the best returns available in global property at present. Dubai rents have rocketed due to a shortage of completed property, and so the return for landlords is high.

Market forces

This factor alone ought to guarantee at least one more upward movement in prices before the inevitable correction - perhaps as new supply kicks in later on next year. In short, market forces should push house prices sharply higher to produce falling rental yields.

It is striking that rental returns of three to four per cent are common in London, while in Dubai landlords expect eight to 10 per cent. A sudden spike in Dubai real estate prices could return this rental yield to something more in line with international levels.

Moreover, the capital needed to push Dubai real estate prices higher is clearly available in the Middle East which is awash with oil money at the moment with less and less investment opportunities. The only downside for investors, of course, would be that price spikes in investment markets are usually short-lived and it is harder to exit property than to buy it.