3 October 2016

Dubai: Just Being Mean

Mean reversion is a theory that suggests that trends and prices eventually revert towards their historical averages. This phenomenon has been widely used as a statistical tool to analyze market conditions and predict price movements. Prices tend to gravitate towards their mean (rolling 12 month average) over time after prices have deviated from their historical averages. A historical look into US and UAE equity market reveals that prices have reverted to their 12 month rolling averages over the last 10 years.

Real Estate prices, similarly to equities, demonstrate a mean reverting behavior. A technical analysis of the Dubai real estate market reveals that a bull rally is on the horizon as prices rise above their historical 12 month average.

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The above graph illustrates the times in the Dubai real estate market when prices have crossed over their rolling averages. In both instances (2008 and 2014) when the correction began, prices fell below their rolling averages. In the current cycle we can witness that prices have risen close to its rolling average indicating that an upward trend is on the horizon. This trend is already underway across communities, and is a trend that we opine will continue.

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