Colliers International Q3 2010 House Price Index for Dubai Records 6% Decrease
Average house prices in Dubai have fallen for the second consecutive quarter this year according to the Colliers International Q3 2010 Dubai House Price Index published today. The index recorded a 6 per cent decrease in house prices since Q2 2010 and has reached the lowest recorded level since Q2 2009.
The index fell 7 basis points from 114 in Q2 2010 to 107 in Q3 2010, while the blended average house price for Q3 2010 was approximately AED 951 per ft² (AED 10,236/m²), down from AED 1,015 per ft² (AED 10,925/m²) in the second quarter.
The year-on-year performance of the index followed the same pattern as the quarterly results, reflecting a 6 per cent decline in overall house price values from Q3 2009 to Q3 2010, with the index dropping from 114 to 108 points for the same period.
"Since Q3 2009 the index has been hovering around the same values, but in Q3 2010 the variation is larger, moving from an annual variation of last quarter of 1.8 per cent to 4.8 per cent this quarter. In effect, after a period of stable prices we are beginning to witness a shallow but lengthening slide in overall average prices," said Ian Albert, Regional Director at Colliers International.
"This quarter's decline can be attributed to the anticipated summer seasonal slowdown, evidenced by a quarter-on-quarter fall in transactions of 4 per cent, and the continued tightness of finance. Despite some improvements in Loan to Value ratios and interest rates, lenders, the banks and financial institutions remain committed to a conservative lending policy typified by greater due diligence in the lending criteria."
Colliers views the return of Tamweel, one of the biggest lenders in the Dubai market, as a potentially positive sign, especially if the resumption of its lending activities boosts monetary supply and encourages buyers back into the market. It remains, however, difficult to assess the degree of such improvement given the current muted performance of the market and unknown plan for Tamweel.
In the latest HPI report, Colliers enhances its analysis with two further indicators that adopt different views to assess the relative strengths, weaknesses and position of the Dubai residential market. The first compares the performance of the House Price Index to the Dubai Financial Market since its inception in Q1 2007. Between inception and Q2 2010 the HPI, reflective of an investment in the residential real estate market, has provided higher returns and much lower degree of volatility.
The second indicator to be introduced is a Price-to-Rent ratio. The ratio is widely used as an indicator of the underlying value, generated from rental income, of real estate assets. The ratio helps in identifying when house prices deviate from their average, or their fundamental value, indicating either a potential bubble or undervaluing of real estate.
With Q2 2007 taken as the base (equal to 1) the long run average of Dubai residential property is 1.23. This compares to the house price peak in Q2 2008/Q3 2008 when the ratio stood at 1.56 and the severe correction in Q1 2009 when the ratio declined to 1.11.
"In Q3 2010, the ratio stood at 1.31, 6.4 per cent higher than its long run average. It is envisaged that house prices may fall at a much larger rate than 6.4 per cent as further declines in rental values are expected, which will exert a larger downward press on prices," said Albert.
On a global scale, the price to rent ratio provides a useful tool for comparison between markets. The Price-to-Rent ratio in the US is currently 1.021, 4% higher, than its long run average of 0.99, despite the market fragility. In the UK, the PRR stands at 1.22, against its long run average of 0.94, indicating that house prices in the UK are 29% overvalued. In Hong Kong, where the real estate market is growing , the PRR ratio is 50% higher than its long run average of 1.06.
In the UK and the US, where the rental markets are generally flat with minor fluctuations, house prices are expected to fall in line with the ratio. In a rising market, however, like Hong Kong, price falls are not expected in the short term, because Hong Kong and China as a whole are experiencing robust economic growth, with high demand for properties from investors.
Commenting further on the HPI Ian Albert said: "The indicators confirm the existing trend within the Dubai market. First we had the severe boom and bust of 2008/9 where the market was characterized by extreme price fluctuations. Then, after the severe correction, the market stabilized and now, it would appear, we are witnessing a slow but protracted decline in asset values. This reflects the reality on the ground as occupancy rates fall to 80 per cent and the market is unable to absorb the additional supply without a growth in the population or a slowdown in the release of stock."
The global real estate consultancy expects around 33,000 units to be released onto the market by the end of 2010, down from its earlier estimate of 41,000 following project delays or rescheduling. However, given Dubai's history so far, a large number of these units may not be delivered on time and may cross over into 2011.
The index, compiled using actual mortgage transaction data from a consortium of financial institutions, showed transactions decreased by 4 percent in Q3 2010 compared to Q2 2010. As in the previous quarter, demand was driven by end-users and oriented towards established residential projects with completed infrastructure and facilities.
"The market conditions remain good for tenants who are benefiting from falling prices, and therefore rents, but painful for investors, who are seeing their potential income generation squeezed by the skewed demand-supply dynamic," said Albert.