UBS report 2022

Key take aways…extracts and comments by Laura Adams, Director at Provident Real Estate, Dubai

Global

In many cities, there is not enough housing supply. And by its very nature, housing supply cannot be expanded at will in the short term. Thanks to urbanization, this means property prices should rise significantly in the long run—more or less summing up the common narrative on the value growth of urban homes. The strong real estate boom of the last decade underlines this credo once again. However, if urban residential rents are used as a benchmark, the supposed scarcity effect evaporates: rents have only risen hand in hand with local wages over the same period.

Nominal house price growth in the cities analyzed accelerated to 10% from mid-2021 to mid-2022, representing the highest increase since 2007. Four US cities—Miami, Los Angeles, San Francisco, and Boston—are among the top five with the fastest-growing prices.

Imbalances are sky-high in both analyzed Canadian cities, with Toronto topping the index. Valuations in Frankfurt, Zurich, Munich, and Amsterdam also show elevated risks in Europe. In contrast, there is no bubble risk in the US cities.

Global Overview

In light of the above Global overview, Dubai is STILL ‘fair’ valued making it one of the least risky property investments.

Other housing markets with signs of overvaluation include Madrid and Singapore. Sao Paulo—an addition to this year’s index—is fair-valued alongside Milan and Warsaw. And despite a buoyant year, Dubai’s housing market is in fair-valued territory too.

Identifying a bubble

Price bubbles are a recurring phenomenon in property markets. The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. But historical data reveals patterns of property market excesses. Typical signs include a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity. The UBS Global Real Estate Bubble Index gauges the risk of a property bubble on the basis of such patterns. The index does not predict whether and when a correction will set in. A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a decline in house prices.

The index score is a weighted average of the following five standardized city sub-indices: price-to income and price-to-rent (fundamental valuation), change in mortgage-to-GDP ratio and change in construction-to-GDP ratio (economic distortion), and relative price-city-to country indicator. The price-city-to-country indicator in Singapore, Hong Kong, and Dubai is replaced by an inflation-adjusted price index. The approach cannot fully account for the complexity of the bubble phenomenon. We cannot predict if or when a correction will happen. Hence, “bubble risk” refers to the prevalence of a high risk of a large price correction.

Return on Investment

Dubai is indicated as the 2nd fastest investment to be repaid by rent, 15-20 years as opposed to London which will take 30-32 years.

It will take 4-6 years to save for a property in Dubai, opposed to 12-14 years in London

Dubai

Dubai’s two-decade property roller coaster continues to chug along. After seven years of falling housing prices, Dubai’s housing market rebounded to a nominal price growth of 10% between mid-2021 and mid-2022. Growth was even stronger in the prime market. However, the market is now only back to its 2019 price level, and still 25% below its 2014 peak. The Dubai housing market is in fair-valued territory. The post-pandemic reopening of the economy and surging oil prices have propelled the recovery. Disposable income growth has now turned positive for the first time since the beginning of the pandemic.

Looking ahead, the market is likely to benefit from a new visa program with looser residence requirements for skilled professionals and new regulations increasing transparency of transactions.

Dubai is already attracting more skilled and wealthy migrants from other regions, where the investment climate has become less favorable. This population inflow has impacted both the prime owner-occupied and the rental market. Rents bottomed out last year and have climbed by 22% since mid- 2021. As these new tenants settle in, they will eventually become potential buyers.

Rents in Dubai have grown 13.3% in 2021, the highest globally.

Data from UBS Global Report 2022, comments by Laura Adams

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