Dubai’s property market recovery won’t slow due to interest rate hikes

When COVID-19 hit in 2020, the US Fed exhausted everything it had to fight the pandemic-induced recession, to the point of offering a near-zero interest rate. Falling interest rates have encouraged businesses to invest and borrow cheaply.

It also encouraged homebuyers, lured by historically low mortgage rates, to jump into the housing market. What the Fed was doing to help recover the economy from the pandemic is now behind us. The Federal Reserve has completely gone into inflation-fighting mode.

In the United States, the interest rate on 30-year fixed mortgages was 3.11% – it is now 5.27% and the highest since 2009. This means that banks have no only increased their mortgage rate, but also began to make eligibility stricter than ever. before, effectively discouraging many from entering the housing market.

Where do we go from here?

No one can be certain how aggressively — and how quickly — the Fed will continue to raise interest rates, although many expect it to be. It all depends on the next stage of inflation from now on. In 1981, the average 30-year mortgage rate soared above 18%, which ultimately plunged the US economy into recession.

In 1981, the average 30-year mortgage rate soared above 18%, which ultimately plunged the US economy into recession.
Image Credit: Supplied

Real estate in Dubai is more resilient

Although the Dubai property market is not immune to the impact of trends in the global economy, it is likely to outperform the US and EU markets. Dubai has a very strong resilience to interest rate risk for three main reasons:

• Historically, the Dubai property market has not been a mortgage driven market as mortgage rates have always been more expensive than in the US and EU. Add to that mortgages in the EU are almost a prerequisite strategy to help investors minimize the cost of all taxes. Dubai remains a tax-free haven for capital gains, rental income and inheritance.

• The first quarter of 2022 saw an overall decline in mortgage transactions of 27%, totaling 5,387 transactions and a 35.5% drop in value amounting to Dh25.1 billion, according to data from . Taking a closer look at mortgage versus cash buyers for residential apartments from January to the end of April, mortgage buyers for ready apartments fell 18.5% in transactions and 6.1% in value . Cash buyers grew 49.7% in number of transactions and 101.9% in value during this period.

• Average house prices in Dubai are considered to be undervalued not only compared to other global cities, but also compared to historical prices. With the exception of post-Covid ultra-luxury real estate prices, prices in 2022 are lower than the prices of the 2014 peaks. This is unlike the US real estate market, which has more than doubled since the global crisis in 2009 .

What is the risk ?

The Fed seems determined to raise rates to fight inflation; however, so far we have not seen any major price dips. For Dubai, I don’t see any major micro-risk.

Five fundamental factors

• Housing prices in Dubai today are more than reasonable considering the global scale as well as historical housing prices over the last 10 years. This creates a clear opportunity to enter the market.

• Despite post-pandemic price recovery at around 2014 prices, Dubai’s hard and soft infrastructure has improved 10 times over the past 10 years. This makes today’s home prices even more attractive than in any other city.

• Dubai’s population has grown by almost 100,000 over the past two years and will exceed 3.5 million in 2022. This is a major pillar of growing demand in the housing market.

• There is strong upward demand from across the EU in the Dubai property market as these buyers see the market as cheap and with plenty of opportunities for short to medium term capital gain.

• A shift in the mindset of developers post-covid sees them focusing more than ever on life experience elements in their projects. Unlike in the past where most projects seemed to have too many similarities.

Penny D. Jackson