ArabianMoney.Net

Dubai house prices rose 78 per cent in the year to the end of Q1, according to a report from Colliers International. But all the anecdotal evidence suggests that rising prices have continued since then, and may have considerably further to go as the Federal Reserve cuts interest rates again this autumn.

The UAE currency peg to the US dollar means that the interest rate cuts to two per cent this year have been matched locally, despite the economy being in an oil boom rather than an economic slump. Local mortgage rates on four-year fixed rates have fallen as low as 5.3 per cent.

Falling interest rates mean that local bank deposits earn around one per cent while rental yields in Dubai range from five to seven per cent. Landlords can still buy-to-let and cover their mortgage costs, although less than 25 per cent of freehold properties are actually under a mortgage.

Now a 78 per cent price gain in a year is going some. But this momentum towards higher prices will continue until something happens to slam on the brakes. In fact, the likelihood is that the Fed will put its foot down on the accelerator at least one more time, probably this autumn, and cut interest rates again.

Today the second largest bank in the UK, Royal Bank of Scotland has informed its clients that it expects a credit and stock market crash within three months. If this happens the Fed will inevitably respond with a further cut in interest rates from two to one per cent.

That will mean the cost of servicing a Dubai mortgage will fall immediately by up to 20 per cent. The local stock markets will take a tumble with global markets as we saw last February. And with nowhere else to go local investors will pile into property as they did after the UAE stock market crash in 2006.

After that how much longer the Dubai real estate boom will last is probably dependent on a time-lagged response to falling global oil prices, and surely oil prices will drop sharply in response to a global credit and stock market crash. Dubai house prices are going to be very much a side-show to the main event which will be salvaging the global economy and preventing a recession turning into a depression.

Hence low interest rates are likely to persist for quite some time and dampening Dubai house price inflation is probably not going to figure highly on the list of macroeconomic priorities.

Reason then to predict that the 78 per cent price hike seen in the year to the end of the first quarter is not the final call in this house price boom. It could well run until the Federal Reserve tightens interest rates, and that may well be years and not months away.
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