Realty price bubble risk lowest in Dubai: UBS

Dubai’s property sector is the only market with the lowest price bubble risk among 25 leading global cities, according to a new survey conducted by a leading Swiss multinational investment bank.

Dubai’s real estate sector is an undervalued market, and the only one to be classified in a lower risk category than it was last year among the 25 global cities surveyed, the UBS Global Real Estate Bubble Index 2021, a yearly study by UBS Global Wealth Management’s Chief Investment Office, shows.

“Prices in Dubai were still falling, however improved affordability, easier mortgage regulations, higher oil prices, and an economic rebound now seem to have finally kick-started a recovery. Although construction has slowed, essentially limitless supply poses a risk for long-term appreciation prospects,” the UBS study noted.

The survey indicates that the bubble risk has on average increased during the last year, and has the potential severity of a price correction in many of the cities tracked by the index.

Frankfurt, Toronto, and Hong Kong exhibit the most elevated risk levels on housing markets. In contrast. However, a housing market recovery is likely to gain pace. On average, house price growth in the cities analysed has accelerated to six per cent in inflation-adjusted terms in the last four quarters, the highest increase since 2014.

“The coronavirus pandemic confined many people within their own four walls, amplifying the importance of living space, and leading to a higher willingness to pay for housing. At the same time, already favorable financing conditions have improved even more as lending standards for home buyers have been relaxed. Moreover, higher saving rates and booming equity markets have freed up additional housing equity,” said Claudio Saputelli, head of Real Estate at UBS Global Wealth Management’s Chief Investment Office.

PNC Menon, chairman, Sobha Realty, said the UBS survey underscores Dubai property market’s price competitiveness and its growing appeal to global investors.

“Dubai’s rebounding market offers world-class quality at prices that have the lowest bubble risk.”

“We enter the next 50 with infinite opportunity. The vision of our leadership has fuelled innovation and progress and we at Sobha Realty are grateful to be part of that roadmap, blending quality with excellence and working towards better infrastructure and sustainability,” said Menon.

The latest data released by Property Finder for the third quarter of 2021 showed the total value of Dubai property transactions reaching Dh42.35 billion in 15,926 deals, making the quarter the best ever in terms in the history of the emirate’s real estate sector.

Data showed sales transactions volume increased 85.36 per cent in the third quarter of 2021 as compared to Q3 2020 while value increased 135.4 per cent during the comparative period.

The UBS report further said risk is also elevated in Munich and Zurich; Vancouver and Stockholm have both reentered the bubble risk zone. Amsterdam and Paris complete the list of cities with bubble risk.

All US cities evaluated—Miami (replacing Chicago in the index this year), Los Angeles, San Francisco, Boston, and New York—are in overvalued territory. Housing market imbalances are also high in Tokyo, Sydney, Geneva, London, Moscow, Tel Aviv, and Singapore, while Madrid, Milan, and Warsaw remain fairly valued. Dubai is the only undervalued market and the only one to be classified in a lower category than last year, the study said.

House price growth accelerated to six per cent in inflation-adjusted terms from mid-2020 to mid-2021. All but four cities—Milan, Paris, New York, and San Francisco—saw their house prices increase. And double-digit growth was even recorded in five cities: Moscow; Stockholm; and the cities around the Pacific, Sydney, Tokyo, and Vancouver. A combination of special circumstances has sparked this price rally.

The low user cost of owning property compared with renting at the moment, along with the expectation of ever-growing house prices, makes homeownership seemingly attractive for households, regardless of price levels and leverage. This rationale may keep markets running for the time being. But households have to borrow increasingly large amounts of money to keep up with higher property prices,” said the study.

In fact, the study noted that growth of outstanding mortgages has accelerated almost everywhere in the last quarters, and debt-to-income ratios have risen.

“Overall, housing markets have become even more dependent on very low interest rates, so a tightening of lending standards could bring price appreciation to an abrupt halt in most markets. Nevertheless, leverage and debt growth rates are still well below their all-time highs in many countries. From this perspective, the housing market is unlikely to cause major disruptions on global financial markets.”

“A long, lean spell for cities’ housing markets looks more and more probable, even if interest rates remain low,” said Matthias Holzhey, lead author of the study and head of Swiss Real Estate at UBS Global Wealth Management.

— issacjohn@khaleejtimes.com