Exploring the term ‘affordable housing’ in Dubai

In the last few years, affordable housing has become something of a buzzword in the UAE. But because the concept is a new one here, there’s still some discussion about how to define it. Questions persist around what constitutes ‘affordable’, what the need is, how it can be met, and what this means for property investors.

Is it even necessary given the recent drop in property prices?

With this in mind, let’s look at some of the main discussion points surrounding affordable housing and the term affordability in Dubai.

1. Affordability is relative: a macro-look

At present, in Dubai, 3-4-star restaurants and hotels have seen growth, schools have dropped their prices for the third consecutive year, rents are down 20-25 per cent and will drop another 5-10 per cent over the next 6-9 months, property prices are down 30-40 per cent and only now starting to stabilise. Overall everything has started to become cheaper.

Globally people spend an average of 30-33 per cent on their accommodation. To become competitive as a nation and to encourage people to put down roots and stay past 5-15 years, there needs to be a cost benefit in terms of housing and schooling.

The stronger dollar had compounded this in the UAE and started to affect the UAE’s competitiveness and affordability from 2012/2013 onwards, but with the recent drop in pricing and costs across the entire UAE, we will start to enter a phase of global competitiveness once again from the end of 2019. And all it would take to see that growth would be a drop in the USD value or a spike in oil or commodity pricing in the coming months, which is highly possible.

2. Affordable housing: is it even relevant?

Is it really needed, and does it need to be embraced as prices are being driven down?

A low-income housing policy has been given the green light in Dubai. That said, the UAE government has yet to formally define what it constitutes as ‘affordable’.

However, according to a 2018 Deloitte report, ‘in Dubai, rents or mortgage repayments are deemed affordable if they are less than Dhs9,300 per month – or approximately Dhs112,000per year’.

Stats show that the current average sales price for a studio apartment in Dubai is Dhs670,000, but prices vary greatly. For example, a studio apartment in Jumeirah Lake Towers can cost Dhs675,000. But the same property in International City will be half that price.

Given that the average wage is Dhs16,775, and the cost of living is relatively high, and taking into account there’s a transient international population, is that amount really affordable?

How can this be resolved?

I recently noticed a statement: “the fact remains that low cost housing should be reserved for those in genuine need – rather than those looking to make an investment.”

While I would normally tend to agree with that in most countries with a social welfare system and a tax-based environment, the UAE’s economy is very unique.

Expats must have a job and a visa to stay and work in the UAE. ‘Those in genuine need’ is a loose term and not as applicable to the term ‘affordable housing’ in the UAE. It is more on an individual level of those who have run up bad debts, lost their jobs or got themselves into trouble. Not people priced out of the housing market.

Earmarking development land and properties would be a step in the right direction but setting in stone precisely ‘who’ it’s for is an important first task.

In my opinion, we need more developments like Discovery Gardens or one step above quality-wise between Discovery Gardens and JLT, with sale restrictions for 2-3 years after completion. That way they are purchased by real end users. This will allow an opening up of the lending market to allow foreign lenders to place a charge on properties they lend against in the UAE and would remove the monopoly the local banks have on lending.

It would also make it easier for the growing middle class to join the property ladder, which would have a net effect on those staying longer in the UAE and putting down roots, creating a longer time eco-system and stability.

3. Prices of some existing homes are still dropping

Since 2015, we have seen property prices down 30-40 per cent. Smaller units have stabilised and stopped dropping and recent off-plan sales have incorporated the drop in prices with adjusted payment plans. But units that are two-bedrooms and larger have another 5-8 per cent to go before bottoming out, excluding three-bedroom plus maids, which cover a number of market and demand segments.

While the outlook today is much less bleak, the 2018 Deloitte report also shows that by November 2017, ‘Dubai’s residential market experienced an average decline of approximately 15 per cent from its peak in Q3 2014′.

This begs the question: if prices are dropping and becoming more ‘affordable’, is there a need to build more homes?

It all comes down to the agreements made between the government and developers, which have yet to be decided.

4. Quality matters most

Will less expensive housing really make a difference to overall ownership numbers?

Those who come here for a short period of time tend not to maintain ties to the city for the long term. And deep-pocketed prospectors will continue to focus their attention on high-end, luxury real estate.

Developers also opt for high-end projects because of the bigger margins – and according to the Deloitte report ‘margins are typically low in the real estate development industry in Dubai, in comparison with other industries’. Therefore, there’s little incentive for them to build low cost housing.

Quality is what counts. Demand for properties with less square footage is strong – as long as they’re well located, offer access to popular amenities, and are built by reputable developers.

Instead of assuming affordable housing is a panacea, developers should look at specific buyer needs and address the notion of value.

5. Dubai is actually affordable compared to other cities

While there is undoubtedly an abundance of (built and off-plan) luxury properties available here, the cost of purchasing a standard mid-market home in Dubai is still overwhelmingly affordable, unlike many other major cities around the world.

Hong Kong remains the most expensive city globally to buy real estate. The UBS Global Real Estate Bubble Index 2018 report states that the city’s ‘residential market prices have risen again by more than 10 per cent in inflation-adjusted terms over the last four quarters.’

In Europe, it’s Munich, Amsterdam, and London that top the charts. In the US, New York and San Francisco remain the most expensive markets.

However, Vancouver, Canada – a considerably smaller city – ranks as the second least affordable property market in the world. A study by RBC staked ownership costs as a percentage of median household income in Vancouver at 117 per cent.

By comparison, according to the Bloomberg Global City Housing Cost Index, accommodation costs in Dubai account for 47 per cent of the self-reported average income in 2017.

When compared with other leading global cities, Dubai is surprisingly affordable given the quality of lifestyle that it offers. The hope is that the 2018 and 2019 figures show a drop into the 30’s, percentage wise, which is what we need to achieve to keep our middle class and for them to set down roots.

More arrivals mean more demand

There can be no doubt that there’s a long way to go in addressing the affordable housing conundrum, but the supply and demand balance has tackled most of the problem in the last 3-4 years.

Ultimately, affordability is the result of many different factors – including house size, location, facilities, local amenities, and the overall cost of living in the area and running a household. It’s not just how much the property itself costs.

Compared with other emirates like Sharjah – which many commuters call home – the cost of living in Dubai is significantly higher. But real estate within the city continues to command a premium for many different reasons. And this is why Dubai real estate will always be in demand.

Perhaps the heady days of apartment flipping to make a quick profit are over in Dubai. But property that’s treated as an investment in the right environment will always recover in the long run. We have seen the smaller end of the market stabilise in the last few months, which is a good sign for things to come from 2020 onwards.

Michael Burke is the managing director of Arabian Escapes