There is an inadequate supply of properties in many cities but it cannot be arbitrarily increased in the short term due to its very nature. This essentially summarises the common narrative on the value growth of urban homes and indicates that property prices should increase significantly in the long run as a result of urbanization. This tenet has been reinforced by the recent robust real estate boom. However, if urban residential rents are used as a benchmark, the alleged scarcity effect vanishes because, during the same time period, rents have only increased in lockstep with local wages.
Thus, the primary cause of the skyrocketing home price growth is elsewhere. In fact, central banks have long served as a major pillar supporting the real estate market. Buyers’ expectations of prices are growing more optimistic due to extremely favourable financing terms and a demand that exceeds supply. In some recent instances, even the highest hopes have been surpassed. As a result, the imbalances have gotten much worse.
But things are quickly shifting. In order to combat high inflation, interest rates and subsequently, financing costs have increased recently. Several shocks have simultaneously rattled the financial markets all over the world. As a result, prices for owner-occupied homes are probably going to drop. Such an adjustment could take the form of a prolonged stagnation in nominal purchase prices and a price correction in real terms—that is, adjusted for inflation—in cities with rapid population growth. But as real estate markets rarely trend sideways, this is not the most likely outcome.
Are real estate markets bubbling up globally? – An overview
Word is that imbalances are becoming more acute across markets, with Toronto and Frankfurt displaying severe “price bubble characteristics.” The nominal house price increased at the highest annual growth rate since 2007. In 2022, it has grown at an average of 10% across 25 major cities worldwide.
Inflation and asset losses owing to the current volatility in the financial markets are diminishing consumer spending power, which inhibits demand for more living space. Because borrowing rates in many areas are rising faster than yields on buy-to-let investments, housing is also losing appeal as an investment. The final pillar of support for the “owner-occupied” housing market in most of the examined cities is the still strong labour market. However, it also runs the risk of failing if the economy continues to deteriorate.
Real estate industry is experiencing the owner-occupied housing boom finally under pressure internationally, and in the majority of the highly valued cities, considerable price reductions are to be expected in the next quarters.
According to the UBS Global Real Estate Bubble Index 2022, a yearly study by UBS Global Wealth Management’s Chief Investment Office, all five US markets examined by UBS are overvalued, with Miami and Los Angeles experiencing greater imbalances than San Francisco, Boston, and New York. Despite certain moderating trends, the housing markets in Stockholm, Paris, and Sydney continue to be overvalued. Additionally, there are still overvaluation indicators in Geneva, London, Madrid, and Singapore. However, several indications have been received that Warsaw, Sao Paulo, and Dubai markets are properly valued.
Zurich, Munich, Hong Kong, Vancouver, and Amsterdam have increased risks. Tel Aviv and Tokyo, noting that imbalances in global metropolitan housing markets continue to be extremely elevated and prices are out of pace with rising interest rates, join the cities in the bubble risk zone for the first time since UBS started publishing this study in 2015. Milan and Sao Paulo are the two other cities with the lowest risks of a real estate bubble. Toronto and Frankfurt have the highest risk levels on property markets, while Dubai’s housing market is in fair value territory despite just having returned to its 2019 price level and still 25% below its 2014 peak.
Dubai real estate market on the rise
The reopening of Dubai’s economy following the pandemic and the rise in oil prices have sped up the recovery. It has been noted that disposable income growth has now changed for the better for the first time since the pandemic’s start. A new visa programme with loosened residency restrictions for experienced professionals and new legislation improving transaction transparency will likely benefit Dubai’s real estate market.
Dubai is already luring more affluent and qualified immigrants from other areas where the business climate has deteriorated. This population increase has influenced both the prime owner-occupied and rental markets. It is notable that Dubai prime areas are in higher demand with property prices up 90%. Rents reached their lowest point last year and have since increased by 22%. The research predicts they will eventually become potential buyers as these new tenants settle in.
Despite severe constraints, Dubai’s real estate market has experienced exponential expansion over the past few years. Any discussion of the upcoming Dubai real estate crash in 2022–2023 is distant from investors’ minds because Dubai handled the epidemic considerably better than practically all other nations. Any short-term losses experienced by any market will be lessened by investors that follow a long-term investment strategy for Dubai off-plan properties. As numerous market categories continue to perform strongly, HNWIs and overseas investors are the main drivers of demand.
A spike in property prices in Dubai
Over the past few years, Dubai’s rentals have climbed along with the price of real estate. The price increases are expected to continue. Moreover, 2022 is anticipated to end on a positive note, with more investors and HNWIs entering the market, making it one of the top real estate locations globally that are not at risk of a bubble.
Moreover, a majority of real estate experts are also of view that Dubai property prices are expected to continue rising in 2023. Average mortgage rates have nearly doubled since mid-2021 across all locations studied. The amount of living space financially feasible for a highly qualified service worker is, on average, one-third less than before the epidemic due to significantly increased real estate prices.
Is Dubai a risk free zone now?
Dubai’s economic rejuvenation following the pandemic and the rise in oil prices have expedited the recovery. For the first time since the start of the pandemic, the growth of disposable income has now moved from negative to positive.
In the near future, the market is probably going to gain from a new visa programme with softer residency requirements for professionals with skill sets and new regulations increasing transaction transparency. Dubai is already luring more affluent and skilled immigrants from other areas where the business climate has deteriorated. Both the prime owner-occupied market and the rental market have been impacted by this population increase.
Since mid-2021, when rents peaked, they have increased by 22%. These new tenants will eventually turn into potential buyers as these new tenants settle in. In the upcoming quarters, house price growth is probably going to stay strong, but growth rates are going to gradually slow down due to higher financing costs. In the long run, Dubai’s real estate market will probably continue to be unsteady because of the existing oversupply and the continued outpacing of population growth by new construction.
