Buy a home in Dubai and beat local inflation

Inflation is surging in the UAE. Food, maids, dry-cleaning, restaurants, petrol and particularly rents - everybody who lives here knows that costs are rising dramatically. Does buying a property offer some protection against the relentless daily increases in the cost-of-living? Yes is the short answer.

Actually, in an inflating economy it makes sense to buy almost anything today, and pay tomorrow. And it is the same with a home, which is the biggest item of expenditure in most budgets.

To take an extreme example, look at what has happened to those who bought in Dubai with a mortgage three years ago. The value of that home may have doubled or tripled, but the debt has fallen a little with repayments, while the monthly cost of the mortgage will have remained relatively unchanged.

Readers who pay rent will hardly need reminding that their fate has been very different. Unfortunately, they should also appreciate that the likely future scenario is worse and not better.

No cap on rents
Already we are hearing that a voluntary rent cap is proposed for 2008, and while it would be nice to think that generous landlords will take this opportunity to cut rents, economic experience suggests rents will go higher. The supply of completed new property is also just not enough to keep up with demand.

What happens next is that staff will ask their employers for higher salaries, and if they are not given a raise then they will move on to another employer that is prepared to pay more.

This is known as an inflationary wage-price spiral; salaries go up which allows people to afford higher rents, which then rise again and people demand still higher salaries that are then taken up by higher rents, or so on.

This type of inflation is hard to correct once it becomes embedded in a booming economy, and only a severe downturn can flush it out. In the meantime, those who bought houses get a better and better deal in relation to those who rent.

For as inflation continues the house buyer will see mortgage payments reducing as a proportion of their salary and the capital value of their home going up.

Downside thoughts
Of course, what will break this happy situation for the home buyer is either a major economic downturn, or an increase in the supply of property above the level of demand.

However, the renter of property will still have to pay the rent in a downturn, and will not be accumulating any savings in the equity of their property as the debt is discharged. Besides property markets have a habit of swinging back up again, and any distress is likely to be a passing phenomenon.

Finally, if the UAE keeps its currency pegged to the US dollar then buying is a no-brainer as interest rates on mortgages are likely to go much lower, and the cost advantage in comparison to renting will be very obvious; and that will also likely inflate house prices much further.