3 factors influencing property prices in Dubai

The pace of increase in Dubai’s property prices has slowed down in the second quarter 2014 after having shot up by over 20 per cent in 2013, Colliers International has said.

Last week, the consultancy said the rate of growth in house prices slowed down in Q2, with prices rising only three per cent compared with a five per cent increase seen at the end of Q4, 2013, and Q1, 2014, respectively.

Colliers attributes three reasons (below) that influenced the market in Q2, but states it remains “optimistic about the year ahead” and “it is too early to call a trend.”

Real estate pundits have ruled out the possibility of correction in the market, with many expecting prices to rise in future driven by the wider economic upturn and strong economic fundamentals of the UAE.


Increased rental rates

The escalating rental costs in prime locations have led many tenants to relocate to more cost effective locations such as Jumeirah Village, Dubai Sports City, Dubai Silicon Oasis and Discovery Gardens. As tenant demand increased so has the attraction to investors with the overall impact being a consecutive increase in rents and sale prices in these aforementioned areas. Motor City particularly, has seen increased activity.

Mortgage cap announcement

In the last quarter of 2013, the UAE Central Bank issued a mortgage cap, which took effect from December 2013. The new rule included a mortgage limit with a loan to value ratio of 75 per cent and 80 per cent for expatriates and UAE nationals respectively for properties below Dh5 million. Properties over Dh5m in value were limited to 65 per cent of the value for expatriates and up to 70 per cent for nationals.
In Q3, 2013, prior to the new law taking effect the expectation of the new mortgage cap put pressure on the market, with investors accelerating their acquisitions in an attempt to take advantage of the mortgage finance available at that time (85 per cent for both expatriates and UAE nationals).

This increase in demand by investors caused a significant increase in values and also an opportunistic increase in asking prices beyond the market values.

In Q4, 2013, the unrealistic increase in asking prices together with an increase in transfer fees may have discouraged buyers causing a drop in transacted demand, decreasing the total volume of transactions by 41 per cent (from 866 in Q3 2013 to 507 in Q4 2013).
In Q1 and Q2, 2014, purchase and asking prices continued to increase, however, the volume of properties actually transacted fell again below Q4 2013 totals. It appeared that the government measures to stabilise the property market were starting to have an impact. This was further illustrated in the stabilization of the villa index in Q2 2014.

Increase in transfer fees

The Dubai Land Department (DLD) doubled the transfer fees for all property sales from October 2013. Transaction costs now consist of the transfer fee of 4 per cent, commission to the agent (2 per cent), non-objection certificate fee to the developer (Dh500 to Dh1,500) and loan application fee to the bank (between Dh2,000 and Dh15,000). The increase in the transfer fees appears to be designed to temper the increase in sales prices and its affect has been evident in the second quarter.




 

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