With US interest rates rising, and UK house prices falling, an important part of the Western property market cycle has probably entered a downturn. Now some buyers in Dubai are from the UK so this may start to have a knock-on effect, but there are still very powerful drivers in the opposite direction.
The decisive falls in property prices in Australia and the UK – two global property markets where price inflation has been highest in recent years – may be the tip of the iceberg for investors.
For property cycles are usually marked by a long upturn and then a sharp downturn and correction until a new floor is reached – how long the market then stays at the depressed level varies from months to years, or even a decade or more as in Japan.
Certainly, the optimistic view proffered by estate agents that market prices will level off at a new permanent high is not a reflection of reality but a myth pedaled to sell property. Thus we have to ask, is Dubai property driven by different forces, or will it succumb to the impact of rising interest rates?
That a long period of ultra-low interest rates is behind the lengthy upturns, and now overvaluation, of global property is pretty uncontroversial.
As the costs of servicing loans have got lower and lower, people can afford to pay higher and higher house prices. They forget in their rush to acquire their new homes that interest rates can also move up as well as down.
There is also a problem with house prices that reach levels that would be unsustainable even if interest rates stayed the same. Then even a minor hold-up in the flow of buyers would bring prices tumbling down, and that seems to be where prices have got to in the UK at least.
The Economist this week indexed houses in the UK at 250 compared with a base level of 100 in 1975, which does tend to suggest that overvaluation is at a very fundamental level. So does this have any relevance in Dubai?
Probably not very much in fact! Dubai property is mainly driven by cash buyers from GCC countries whose appetite for off-plan sales in recent months has been huge. Indeed, it is not untypical for an apartment tower to sell-out in a matter of days, mainly to regional investors and wealthy foreign buyers. Not a very high percentage of buyers need finance in Dubai.
There is also the contrary argument that GCC and foreign investors who might have bought property in the UK or elsewhere will now buy in Dubai because other property markets look to be in a bearish phase. Given that these buyers do not need to secure a mortgage then interest rate movements are not so significant.
Thus an argument can be made that problems in global property markets may well take the Dubai property market higher. The difficulty surely comes later on when Dubai property prices are nearer to global levels – and if the supply of property from landlords exceeds the number of tenants.
That is to say the new Dubai property cycle is at a different phase to the more mature markets of the world, and will in due course over-reach itself, but maybe not for some years. Indeed, from the recent global experience we can see that upswings can last for rather longer than some people expect.
At the moment Dubai property prices are still on a strong uptrend and buyer confidence has never been higher. In such circumstances, not unlike the Western markets of the early 2000s, then the market is likely to continue to move strongly ahead.