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When mortgage data is examined, it is astonishing to note that buying levels by mortgage buyers have remained remarkably stable, rising at a gradual rate despite the overall decline in transactions. On a city-wide level in the freehold space, mortgage buying now accounts for more than half of overall purchases (rising from 28 per cent in 2010) and in certain communities such as Arabian Ranches and Emirates Living, mortgage activity is in excess of 80 per cent of overall transactions.
This implies two outcomes for the real estate market: 1) prices are no longer held hostage to "speculative" or hot money purchases and 2) as the investor base has become more end-user driven, price trends become harder to evaluate as inter-transactional price volatility rises.
Given the paradigm shift of the buying patterns, we believe that price rises will be gradual and slow this time around, unlike the previous cycle. Furthermore, what the rising trend of mortgages attests to over the long term in international developed markets is that the "price inelasticity" rises in communities that are more end-user based.
While it is too early to gauge this in Dubai, initial trends seem to indicate that we are well on this glide path, implying that even as overall supply levels rise, price rises (although moderate) will be accompanied with it as the end-user phenomena increasingly starts to take effect.
Miscalculation
This seems counter-intuitive at first, but just as most market pundits fixated on the supply overhang in oil miscalculated the demand equation, so too there appears to be the same error being repeated by pundits who have fixated on supply launches in the Dubai real estate market.
In a clear redux of "when prophecy fails" tautology, the analyst community has apparently taken price sluggishness as a negative indicator when it has become apparent that prices have turned the corner in community after community. This is not to say that investor sentiment is buoyant at all; in point of fact, investor sentiment remains subdued at the secondary market level as liquidity has been increasingly diverted to off-plan launches.
Developer "price stickiness" as well as end-user purchases which take considerably longer to culminate have been the two major factors that have reduced the apparent velocity of transactions (most analysts report transactions of completed properties, thereby exaggerating the decline in investor activity).
However, as part of the "new normal" paradigm, it has become increasingly apparent that prices are now on a gentle glide path of recovery. What remains to ascertain are the areas in which this takes place the most.
Refreshingly, the only part of the discourse that the analyst community has gotten right in this cycle has been the supply/demand mismatch between the income brackets. In terms of ticket sizes, the sub Dh1 million price tag remains the most popular place in terms of the number of transactions and it is only now that we are seeing end-user options starting to proliferate in this segment.
The maxim "let the data be your guide" has long been the driving force for intelligent decision-making and investors would be well-advised to continue on this path as the recovery in asset prices continues to take market observers off guard.
- The writer is head of IR and research, GCP Properties. Views expressed are his own and do not reflect the newspaper's policy.
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