One of the biggest concerns for investors worldwide is the current surge in inflation, and the possibility that much higher levels of inflation may appear in future years. Buying a fixed asset like a property is a classic defense against the threat of inflation which undermines the value of cash and fixed incomes.
Let us consider how Dubai property has performed to date as a hedge against local and international inflation. Take the example of somebody who bought a property three years ago with a mortgage from Amlak Finance from a local developer like Emaar to live in themselves.
The property will have more than doubled in value, while the mortgage payments will be slightly higher. In the same period there has been a huge inflation of property rental prices. So the person who bought a property has gained from the inflation of real estate prices, and is also paying substantially less in mortgage payments than an equivalent rental cost.
This is how real estate can protect you in a high inflation environment. For the debt on a property will remain fixed while inflation increases the value of the property and the equity element; meanwhile, rental values rise with inflation while mortgage prices remain largely unchanged, although interest rates do tend to rise with inflation, albeit more slowly than rentals.
But does this lesson in the economics of inflation and real estate still apply today? In short, is general inflation rising, and are house prices increasing in Dubai today?
Most Dubai consumers would agree that general inflation is accelerating, and a lot faster than official statistics show. In the case of Dubai it is true that the government ruling on rent increases has slowed rental inflation – to a still high 15% - but anybody who has bought a dinner in a hotel or shopped in a supermarket recently knows that general inflation levels are picking up.
And yes real estate prices are still rising strongly at present. Even the most cursory examination of prices in the pages of the Gulf News property supplements – and there are three per day – shows a 7-15% increase in apartment and villa prices in the first quarter of 2006.
AME Info columnist Dr. Marc Faber has argued that even in the United States, where property prices are often held to be overvalued at present, in an environment of high inflation he would rather own a $1 million home than hold the same amount of cash or bonds, because the house would better preserve value.
Indeed, in many markets real estate has long been considered as a store of value for the future, and a hedge against inflation in an uncertain world.
Dubai has recently underlined its long-term commitment to maintaining a sound real estate market by passing a comprehensive new property law. So perhaps it should not be too surprising if the investment lessons of how to protect wealth in an inflationary environment are now applied in Dubai as well.