Dubai property values ‘fairly priced’ despite 30 months of rises

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• Dubai rents have outpaced 10% house price growth over past year
• Average Dubai prime residential value an ‘affordable’ $870 per sq ft
• This compares to other global ‘bubble-risk’ cities with out-of-sync prices

Property prices in Dubai are still fair despite more than two years of increases seen during its “Covid comeback”, according to new research.

The UBS Global Real Estate Bubble Index 2022 said that despite a “buoyant year”, the market in Dubai is not overpriced.

“Dubai’s housing market has been a rollercoaster ride over the past two decades as demand is highly correlated to the development of oil prices. Surging oil prices and a pick-up in immigration revived the market last year,” said the yearly study by UBS Global Wealth Management’s Chief Investment Office.

“Housing prices have risen by 10 percent between mid-2021 and mid-2022. Rents have even outpaced home price growth over the last four quarters. Accordingly, the market remains fairly valued,” it continued.

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Faisal Durrani, partner and head of Middle East Research at Knight Frank, said that Dubai’s latest price rise cycle still has some way to go to equal its first two.

“Prime residential values in Dubai have grown by an extraordinary 90 percent in the last 12 months. This growth however translates into average prices of close to $870 per square foot, making Dubai one of the world’s most affordable prime residential markets,” he said.

“Dubai is in the midst of its third property market cycle – the Covid Comeback. This far, we’ve had two and a half years of price rises, compared to nearly six years of growth in the first cycle and nearly four in the second.”

By contrast, house prices in Tel Aviv – the other Middle East city analysed – are deemed a bubble risk for the first time. Prices there have roughly tripled between 2001 and 2017. Rents almost kept pace with the price increases, reflecting a fundamental housing shortage. 

The study said: “After a brief period of correction in 2018, the market was back in another explosive phase of price growth. Between mid-2021 and mid-2022 alone, prices climbed by 18 percent, the highest rate since 2010. And outstanding loan volumes shot up by 18 percent, the fastest pace in 25 years. Consequently, the market ranks in bubble risk territory.”

It added that there are imbalances in other global metropolitan housing markets with highly elevated and prices that are “out of sync with rising interest rates”. 

Toronto and Frankfurt top this year’s index, with both markets exhibiting pronounced price-bubble characteristics. Risks are also elevated in Zurich, Munich, Hong Kong, Vancouver, Amsterdam and Tokyo, as well as the aforementioned Tel Aviv.  

In the US, all five analysed cities are in overvalued territory, with the imbalance more distinct in Miami and Los Angeles than in San Francisco, Boston, and New York. 

Housing markets in Stockholm, Paris, and Sydney remain overvalued despite some cooling trends. Other housing markets with signs of overvaluation include Geneva, London, Madrid, and Singapore.

Sao Paulo is fairly valued alongside Milan, Warsaw and Dubai. 

Nominal house price growth in the 25 cities analysed accelerated to almost 10 percent on average from mid-2021 to mid-2022, the highest yearly growth rate since 2007. 

All but three cities – Paris, Hong Kong, and Stockholm – saw their house prices climb. On top of this, an acceleration in the growth of outstanding mortgages was evident in virtually all cities, and for the second year in a row, household debt grew significantly faster than the long-term average.   

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UBS said strong income and rental growth have mitigated the further rise of imbalances, while housing prices in non-urban areas have increased faster than in cities for the second consecutive year. 

As a result of low interest rates, home prices have continuously drifted apart from incomes and rents over the past decade.

Cities in today’s bubble-risk territory have experienced price ascents by an average of 60 percent in inflation-adjusted terms during this period, while real incomes and rents have increased by only about 12 percent.   

Mortgage rates have almost doubled on average across all cities analysed since their lowest point in mid-2021.

Combined with notably increased real estate prices, the amount of living space that is financially affordable for a highly skilled service worker is, on average, one-third lower than it was right before the pandemic. 

“Inflation and asset losses due to current turmoil in the financial markets are reducing household purchasing power, which curbs demand for additional living space,” said Claudio Saputelli, head of real estate at UBS Global Wealth Management’s Chief Investment Office.

“Housing is thus also becoming less attractive as an investment, as borrowing costs in many cities increasingly exceed the yields of buy-to-let investments.”   

Matthias Holzhey, lead author of the study at UBS Global Wealth Management, added that the robust labour market has therefore become the last pillar of support for the owner-occupied housing market in most cities. With a deterioration of economic conditions, this too is at risk of faltering. 

“Indeed, we are witnessing the owner-occupied housing boom finally under pressure globally, and in a majority of the highly valued cities, significant price corrections are to be expected in the coming quarters.”