But why are transfer fees being doubled? The simple answer is that the pace at which Dubai residential prices are rising has been causing concern that yet another ‘bubble’ is forming. Knight Frank’s Global House Price Index shows that, in Q2 2013, prices rose by 22%y/y – making it the fastest growing market of the 55 that the company tracks. Moreover, Dubai significantly outperformed compared to the global average price increase of 2.4 per cent y/y.
Given that, and the fact that the experience of the 2008-09 real estate crash is still fresh in the memories of many, it’s not surprising that the DLD is intervening. But this isn’t anything new. Indeed, similar measures have been introduced elsewhere in recent years – in Singapore and Hong Kong for example, but in different shapes and sizes.
In fact, in Singapore, about seven rounds of measures have been introduced since 2009. Among these was the Additional Buyer’s Stamp Duty (ABSD); introduced in December 2011, it comprised a 10 per cent levy for foreigners and certain entities. But given that it wasn’t particularly effective, in January 2013, the ABSD was raised to 15 per cent for foreigners. Moreover, permanent residents (five per cent) and Singaporean citizens buying their second property (seven per cent) were also brought under the regime. The most recent measure, however, is the Total Debt Servicing Ratio(TDSR) framework. Announced in June 2013, it requires the total debt servicing ratio for any property buyer in Singapore to not exceed 60 per cent of their income. Early signs are that this measure is slowing transaction volumes.
What’s more, since 2009, a number of cooling measures have been introduced in Hong Kong. These include a 15 per cent property tax on foreign buyers, mortgage restrictions and taxes on quick re-sales. Furthermore, in February 2013, the stamp duty was raised from a flat fee of HKD 100 to 1.5 per cent for property worth up to HKD 2 million. Anything over the HKD 2 million mark saw stamp duty double to 8.5 per cent.
However, the introduction of these measures has had varying degrees of success across the two Asian markets. While residential price growth has slowed considerably in Singapore (it stood at 4.5 per cent y/y in Q2 2013), Hong Kong continues to grow apace. Indeed, according to the latest reading of Knight Frank’s Global House Price Index, at 19 per centy/y, the latter was the second fastest growing market after Dubai. But that’s not surprising given that the list of measures introduced in Hong Kong were not as extensive, nor as well-rounded, as Singapore.
So what impact could the rise in transfer fees, to four per cent, have on Dubai’s residential market? In the global context, the increase would mean that the cost of purchasing a property in the emirate would still be relatively low. Indeed, Hong Kong (25 per cent), Singapore (19.3 per cent), London (7.9 per cent) and Sydney (7.2 per cent), to name a few, would all continue to rank higher. Moreover, with prices currently growing at more than 20 per cent y/y, the two per cent increase in the transfer fee, while a bitter pill to swallow, is unlikely to be a significant obstacle.
That said, given that there wasn’t any forward guidance provided, investor confidence may take a hit in the short-term. Indeed, it may be taken as a sign that the market is vulnerable to sudden interventionist policy. However, we think that once the market has adjusted to this development, it is likely to be business as usual.
On balance, Knight Frank believes that a different approach should have been considered. For example, any seller transferring a property a short period after initial purchase could have incurred a fee. Moreover, the hike in the transfer fee should have excluded end-users, thus targeting speculators who have so far contributed heavily to the price gains.
And finally, the DLD could have given the market a grace period of 2-3 months on already agreed sales. That at least would have allowed the market time to adjust, and avoid potential disarray among all those involved in the transaction process.