Peter Cooper: Is This The Right Time To Invest In Dubai’s Property Market?

I remember one Australian chap who sold his Dubai property in early 2008 and went home with a $1 million profit on about five years of ownership. Like many former expats then, he found out that he did not like home too much and came back to Dubai a few years later.

Interestingly, David recently wrote to me saying that he’s buying again this summer in Ramadan. Apparently there are people offering ‘distressed prices’ in the area his wife and children want to live in and the mortgage that he qualifies for is very attractively priced too.

My immediate reaction was that David might be a year early for the bottom of this correction. It started in late 2013 and is barely halfway done if you think in terms of the classic three-year cycle, though admittedly most of the price falls do usually come in the first two years. That said if you need low-cost mortgage finance, now is an excellent time to get it with rates as low as 2.99 per cent.

Somebody from the National Bank of Abu Dhabi cold-called me offering mortgage finance last month. He refused to give his second name when I mentioned that such cold-calling is strictly illegal according to UAE Central Bank regulations. But it was a signal as to just how proactively the local banks are now selling their mortgage products.

If there is a global liquidity squeeze, and many expect some sort of bond market crisis any time soon with the Federal Reserve seemingly locked into raising US interest rates, then higher mortgage rates are a given. And don’t forget the UAE dirham’s peg to the US dollar means that local interest rates will follow higher, no matter what the oil price.

So I suppose you could see this as a two-tier market for buyers. For those who need a mortgage, and that is the majority of UAE buyers these days, the best time to buy could indeed be in Ramadan, in the depths of the ultra-hot Arabian summer, before the Fed makes what will probably be its fatal policy error this Autumn, and raises interest rates.

For those with cash, it is also obvious enough that the lowest house prices will come only after a big hike in the cost of buying a home with a mortgage. Basically, housing prices will have to adjust downwards to the point at which they are affordable to mortgage payers.

That will unfortunately occur because some owners will be forced to sell at low prices once they cannot afford their monthly mortgage payments. We probably all know somebody who has gone off and bought a lot of property recently using borrowed money. They will be the next ‘distressed sellers’.

There will also be people who lose their jobs in Dubai in the slowdown or recession that is coming due to the oil price crash. This is not a very pleasant experience for an expat with debt like a mortgage or car.

Your employer has to inform the bank by law immediately that you are fired and you only get a very limited period to pay off all your debts. In the 2009 real estate crash, many debtors simply fled the country. This repossessed property will also be dumped back onto the market depressing ‘distressed prices’ further.

Of course all markets bottom out. The UAE property market is more mature than it was from 2009 to 2010 when the rampant flipping of off-plan units created a false market.

Recent population growth has been strong and Dubai in particular will continue to attract new residents. Muslims fearing persecution elsewhere are sadly a major potential new source of residents, valuing the tolerance and security of this city.

The oil price will also bottom out, and the money printing of the central banks could reverse this year’s deflation into something far more like a 1970s style hyperinflation.

Home buyers would be protected by the rising value of their property while their mortgage debt would become far less of a burden as salaries rise and monthly interest payments fail to keep up with inflation.

Buying real estate is a classic hedge against inflation, and that’s what the European Central Bank’s $1.2 trillion quantitative easing programme that began last month is all about.

Central banks can simply print an unlimited supply of paper money until they get what they want, and they don’t want deflation at any cost. However, if past precedent is any guide, the central banks always overdo it.