Cost of Living to Fall in UAE Due to Declined Rents, Oil Prices

Published February 7th, 2019 - 07:46 GMT
Inflation in the UAE is expected to decline substantially from 3.3 per cent in 2018 to 1 per cent in 2019. (Shutterstock)
Inflation in the UAE is expected to decline substantially from 3.3 per cent in 2018 to 1 per cent in 2019. (Shutterstock)

Inflation in the UAE is set to decline substantially this year, thanks to falling rents, lower oil prices, strengthening dirham against floating currencies and a fading out VAT impact, making the UAE more affordable in 2019, analysts say.

Inflation is widely expected to stay closer to the range of 1 per cent in 2019, substantially declining from over 3 per cent in 2018.

"I expect average inflation to decline from 3.3 per cent in 2018 to slightly less than 1 per cent in 2019 as the impact of the introduction of the VAT at five per cent fades. The significant decline in inflation in 2019 is also due to base affect," said Garbis Iradian, chief economist, Mena, International Institute of Finance.

The Central Bank of the UAE had projected year-on-year inflation at 3.6 per cent in 2018 in its third-quarter report last year and it will fall to 2.5 per cent in 2019 due to lower oil prices and softening in property rentals and prices.

Other key factors that will drive down the inflation include freezing of school fees by Dubai as well as reduction and waiving off of fines for the small and medium enterprises across the UAE in order to reduce the cost of doing business in the country.

"We expect residential rent declines to continue, albeit at lower pace, as job growth remains low and new housing becomes available. The continued decline in rents is associated with the downward trend in residential prices that started in mid-2014," Iradian said.

Property Finder said in a report last year that the residential property prices in Dubai will continue their decline in 2019 due to increased supply entering in the market. Real estate agency Core said in its latest report that 21,700 residential units were delivered in Dubai last year, which is the highest deliveries since 2011. It sees another 28,500 units will be handed over this year.

Core said both rents and prices witnessed further drops in the emirate.

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"We expect rents to remain under pressure in 2019 and the rental market to continue being tenant friendly. We expect secondary transaction volumes to remain resilient, while sales prices are forecast to drop further due to rising levels of existing inventories and upcoming supply," it said in the report.

According to the latest Cost of Living Index data by Numbeo, which collects database about cities and countries worldwide, Dubai is rated 217th costliest city in the world in 2019 as compared to 210th in the previous year - helped by fall in inflation, stronger dirham and substantial increase in purchasing power of the residents.

Monica Malik, chief economist, Abu Dhabi Commercial Bank, said inflation in the UAE is expected to decline substantially from 3.3 per cent in 2018 to 1 per cent in 2019. But it will slightly inch up at 1.2 per cent in 2020.

"A number of factors will place downward pressure on inflation in 2019, including the impact of VAT in 2018 dropping out of the data, the fall in cost of housing and lower fuel prices," she added.

International Monetary Fund has also said that inflation in the UAE is expected to remain low this year, notwithstanding the introduction of the value-added tax (VAT) earlier in 2018. The impact of VAT on inflation had been limited with a small increase in January 2018 largely dissipating by mid-year. Average consumer price index (CPI), as per IMF figures, jumped from 2 per cent in 2017 to 3.5 per cent in 2018, but it is forecast to drop to 1.9 per cent in 2019.

Khatija Haque, head of Mena Research, Emirates NBD, said in a note that lower rents helped to offset rising prices in the rest of the consumer basket, including utilities and household fuels. "We expect headline inflation to decline sharply in 2019, off the high base and as fuel prices remain well below their October 2018 peak. Our forecast for 2019 average inflation is 1.5 per cent, compared to an estimated 3.0 per cent in 2018," she said in a note earlier.

By Waheed Abbas

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