28 April 2017
Dubai: Interest(ing) Things
Conventional wisdom suggests that a rise in interest rates have a profound effect on property values as it increases the cost of mortgage capital hindering the individual’s ability to purchase an asset.
An analysis conducted in Dubai over the last 14 years reveals that interest rate hikes have had no correlation to price action. In the first bull run from 2003 to 2008, interest rates were at their highest since the inception of freehold; however, prices increased more than 120%. Similarly, during the WFC the 30- year mortgage rate fell 27% from 2008 to 2010. In the same period prices also corrected by 30-40%. This illustrates the impact of interest rates is not a predominant factor in determining price movements.
In Dubai, there is no official home ownership index, however a closer examination into mortgage transactions reveals that the activity has no correlation to the fluctuation of interest rates. In the last several months mortgage activity has continued to ratchet higher despite the recent interest rate hikes. In point of fact, the recent rise in interest rates have actually increased the level of mortgage activity, confounding the prevailing zeitgeist that is embedded in the ecosystem.
The ongoing impact of job consolidation along with the prospects of higher interest rates continue to dominate the zeitgeist amongst analysts, even as empirical evidence continues to suggest signs of improvement in the ecosystem, dominated by underlying fundamentals and strengthening world economic growth.
Given the fact that the price cycle this time around has been subdued, concerns abound on macroeconomic factors. However, we opine that the zeitgeist remains on the wrong side of history, and the narrative of increased home ownership remains firmly in place.