This case study provides an interesting insight into the economic forces at work currently in the UAE, and helps to explain why the Dubai boom is more durable than it appears to somebody stepping off a plane for the first time.
In the case of Perth, house prices are higher per square metre than in Dubai, and even more critically the rental yield on property, or rents as a percentage of house prices, is only 3.8 per cent, the lowest for a major Australian city.
In Dubai, landlords obtain rental yields of 7-10 per cent. You can see the attraction of Dubai. It gets better. The cost of money in the UAE is linked to the US Federal Reserve base rate, which has just fallen to three per cent, whereas in Australia the Reserve Bank has just increased rates to a 11-year high of seven per cent, and two more rises are expected by the summer.
Economic forces are therefore exerting downward pressure on house prices in Perth and upward pressures in Dubai.
Yet it is interesting to note similarities in the cities beyond having their fortunes linked to the respective commodity wealth of their countries. Both cities have a very tight labour market and a shortage of completed property. It is on history and economics that the two part company, and this explains the divergence in the outlook for house prices.
Dubai only opened its property market to foreigners in May 2002 and its prices have risen very sharply since then, but are still well below the absolute levels seen in other cities of comparable GDP, as a recent study from HSBC concluded.
Perth's residential property market is actually still closed to foreigners. But it has always been open to all its residents – unlike Dubai which had closed its market to the 80 per cent of residents who are expatriate up until 2002. Therefore, the property value to income and debt matrix in Perth has always been aligned with Australian, if not exactly to global levels.
One final point: it costs some 25 per cent more to build a housing unit in Australia than they will sell for, except in low land cost locations. Dubai developers clearly think they are going to make a profit on their projects while Perth realtors presently do not. This is partly down to lower labour costs, and also reflects the lower population growth forecasts for Perth which has a stricter immigration regime.
Does that mean that houses in Perth are a sell and real estate in Dubai a buy? With the Reserve Bank of Australia presently raising interest rates to control inflation that looks an inescapable conclusion. House prices will cool despite the booming local economy, and they need to go up to bring back the developers.
But Perth is investing in its future like Dubai. Last week saw the announcement of the A$300m (US$272m) Perth Waterfront Project which follows the recent announcements that the government is to build a A$1.1bn outdoor stadium at Subiaco and a A$506m museum at the East Perth Power Station site.
However, Perth property investors might argue that their government's tough approach to inflation may make the local economy less prone to a boom-to-bust cycle. Yet that is unlikely to compensate them in the short term where the advantage lies with Dubai. See also:Booming Arab construction market brings opportunities, challengesTrue cost of living a rising concern in Gulf