Does it make sense to compare Dubai and Western house prices?

For with US housing in crisis who would be so bold as to assume that house prices in the UK, Spain and other grossly overpriced markets will not follow downwards very soon.

Indeed, the assumption that Western house prices are safe is a bold one in current circumstances. To take the UK, house prices have been rising for a record 13 years, although middle-ranking house prices have been losing ground for two years now. In that period the prices of many homes have tripled while salaries have not gained more than 50 per cent. Is this a sustainable scenario?

Or look at New York where a two-bedroom apartment costs more than a five bedroom villa in Dubai. Yet take home pay for executives in New York is not that much higher than in Dubai. Ask some of the people moving to Dubai from the Big Apple to work in financial services.

Bubble trouble

Surely the most obvious housing bubbles are in the US - where prices are now falling for the first time in 11 years - and in the UK, Ireland, Spain, Denmark, the Netherlands and Australia where recent price increases have been the largest.

In any investment market prices eventually revert to a long term average, probably after dipping below it first, and as certain as night follows day this will happen in these Western property markets.

Home prices are cheaper in absolute and relative terms in Dubai, and yet the IMF says that the UAE will be one of the world's fastest growing economies in 2006.

Yes, it is true that Dubai is an immature real estate market with ownership legislation that is only now becoming clear. There is no established resale market to provide a proper benchmark for valuations. And the law could be changed, although that would appear very unlikely given the political stability of the UAE.

Maturing prices

So does that justify the continuation of low property prices? Logic suggests not, and that as the Dubai market matures then prices will follow international trends in terms of rental yield and capital value.

That could mean that rents fall and capital values remain static or fall slightly. Or it could mean that capital values rise producing a lower rental yield, while rents remain unchanged or fall slightly. In both scenarios investors can calculate their likely discounted cash flow and make their decisions accordingly.

It could also be the case that capital values in the Western markets turn out to be wildly overvalued, and that these markets fall back to Dubai levels. In that case, where would a capital investment be better protected?