Will falling Dubai house prices ever outpace rental increases?

The International Monetary Fund recently published an interesting study of housing markets in emerging economies which pointed out that the average decline in house prices in a downturn was 30 per cent spread over four years. This contrasted with much sharper but short-lived plunges in emerging market equities.

Now the first thing to note in the context of the Dubai property market is that we have not reached the top of the cycle yet. House prices and rentals are still going up. And even the moderately pessimistic Asteco real estate company thinks this will last for another 12-18 months.

Therefore, anybody buying a house will save on rising rentals for up to two years. Perhaps then they will additionally save somewhat less in the succeeding three to four years. Given that property yields are around eight per cent in Dubai, we might reasonably assume that in five years the buyer will have saved about 40 per cent of the cost of their home in rent that they would have otherwise paid.

Capital loss versus rental loss
Now what of the capital value of the same home? Let us assume an average annual gain of 10 per cent for the next two years, followed by an IMF-study average decline in three and not four years. Then you would have to figure in roughly a 10 per cent loss in capital over that five-year period.

On this calculation the savings in rent that would otherwise be paid out on comparable property clearly more than outweigh the risk of losing capital in a market downturn. Indeed the margin is quite wide, and this means that the capital loss on a home could be significantly bigger and it would still be better to buy than rent over a five year period.

This really comes down to what everybody knows who lives in Dubai. Rents are high and landlords are making an excellent return on their investment. Meanwhile, the cost of buying homes is cheap by international standards.

Comfort zone
Therefore, buying makes sense to avoid high rentals. But the additional comfort of this calculation is that even in a falling housing market the money saved from rents can more than offset a fall in capital value.

And buyers should also note that high inflation in the UAE will tend to protect the nominal value of homes. In such an environment buying now instead of renting makes good sense even if you see a property crash on the horizon; and waiting for a crash could prove an expensive error of judgment.

For one thing, paying rent is certain to loose you money while at least buying gives you a chance to win on the upside.