In 2005 the Dubai property market slowed noticeably and the first negative premiums appeared. For 2006 the UAE is facing high inflation levels and negative real interest rates which are supportive of nominal property price levels.
Just to take a step back and look at what happened in the Dubai property market in 2005. This column was perhaps a little over-enthusiastic, but the pessimists were also proved wrong again in predicting a major correction.
The year 2005 was a tale of two markets: re-sale of completed property continued strongly with prices either holding steady at higher levels, or advancing 10% or more in the case of villas; but off-plan sales slowed considerably, and the first negative premiums emerged on certain developments, such as The Golden Mile on The Palm, Jumeirah.
At the same time 2005 was also the year that hyper-inflation arrived in the UAE. The Central Bank says nominal GDP growth was 20% and actual growth 8%, which means core inflation of 12%. Given UAE interest rates are around 8% that means a negative real interest rate of -4%.
Negative real interest rates
Negative real interest rates are generally extremely positive indicators for property markets. However, house price inflation has not been running as high as consumer price inflation, so there is no need to get too carried away.
What we have to ask for 2006 is whether property investors will begin to feel that real estate prices have lagged too far behind general inflation, most notably rents. For it is a fact that rental yields for property investors went up in 2005 thanks to average rental increases of 38%.
Meanwhile, there is an awful lot of real estate under construction in Dubai, and this is leading to fears of oversupply. But this supply will not even begin to come available until the closing months of 2006.
Thus 2006 is a difficult year to judge. We have a very strong macroeconomic factor like negative real interest rates pressing up against a phenomenal building program that looks like the sword of Damocles hanging over the future of the market.
However, with rental increases now officially pegged at 15% for 2006, the rental yield issue is likely to subside somewhat as an upward pressure on real estate prices.
So a safe overall conclusion would seem to be that 2006 will see prices holding steady for completed property, but with the possibility of some weakness towards the end of the year.
Inflation may well prove to be the home investor's best friend, and help to maintain nominal price levels while actual real estate prices fall against the cost-of-living. This will cushion the Dubai property market against the kind of dramatic crash that the pessimists are still expecting.