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Reaching The Floor?
23 Jun 2009
“The Economy Will Get Worse Before It Gets Better!!!” This has been the exasperating and recurring theme of most tirades by politicians, economists and bankers. However, that’s not what the masses want to hear; what they really want is the answer to one question – “How much worse does the economy need to get before starting to get better?”
And in the case of Dubai – “How much more do property prices have to fall before reaching the floor?” While the answer is surely not straightforward, it gets even more complicated with reports, claiming on the one hand that the price free fall is continuing, and on the other that prices have begun to move north.
In reality, the answer to this question depends on buyer and seller motivations and on understanding concepts such as affordability, price floors, listings versus transactions, bid-ask ratios and much more. While Investment Boutique (IB) has been doing this type of analysis since the beginning of 2009, the indicators are finally pointing to some good news with a price trough expected to set-in during the last quarter of 2009, first half of 2010, and price stabilisation anticipated soon after.
Affordability is key in the current market scenario and prices will continue to fall as long as income levels remain at the point where property is not affordable for most end users. Even at the current discounted prices, only the high income groups and a small proportion of the middle income groups can truly afford to purchase property. The affordability threshold was computed by IB analysts as part of the “Better Homes State of the Market Report – Dubai” which was released just over a month back.
According to the model, prices need to fall by 7-18% before becoming realistic and affordable to the middle income segment. It should be noted that this figure ranged between 17-27% just a few months back, illustrating that we may be coming closer to a floor.
While affordability determines buyer behaviour, comparing listings against transactions is a good indicator to understand seller sentiments.
In December 2008, the holiday season and the general slowdown in business resulted in both the number of transactions and new listings falling by around 60%. While the number of transactions saw another decline in January 2009, listings moved upwards by 16%. This was the point where the market first started panicking and when both investors and speculators rushed to offload property. March 2009 saw another large spike of 46% in new listings, pointing to the second ‘panic’ stage in the market.
However, come April, the number of new listings have risen by just over 20% which is indicative of the fact that investors are choosing to hold on to their properties rather than selling at a huge discount. The summer months followed by Ramadan are expected to mirror the December 2008 trend, when both the number of transactions and listings are predicted to fall due to the general slowdown in the market. Some positive movements are anticipated thereafter.
Another approach to figure out where the market is headed is the computation of a price floor based on outstanding mortgage balances. The theory assumes that a seller may be willing to make an overall loss on a property provided he can pay off his entire outstanding mortgage balance.
IB developed a robust model to determine the price floor in the Dubai housing market based on actual transaction data as part of the soon to be released “Dubai Market Pulse Q2 2009”.
The acceptable price floor is largely dependent on when the property was purchased and the prices prevalent in that year. For properties purchased in 2008, prices reached the floor in early 2009 and investors do not have any incentive to sell at this stage. However, investors who entered the market earlier may be willing to sell at current rates or even at slightly lower prices depending on their risk appetite. A weighted average based on annual transactions indicates that prices need to fall by a further 5-7% before reaching the floor.
However, the concept of “price floor” is theoretical, based on averages and depends on how much of a loss a particular seller is willing to accept. Also, it excludes prospective investors who would re-enter the market only on the grounds of a reasonable yield on investments. In addition, it should be noted that the above three approaches do not consider the price pressure that the additional expected supply will exert on the market.
However, the above analysis, coupled with reports of the narrowing of bid-ask spreads, the clearing of distressed stock, the easing of mortgage requirements, the re-entry of foreign investors, the pumping of cash by the Dubai governments and a resurgence in recruitments, together point towards a recovery. Add to this the obvious impact of the Metro and it seems like the last quarter of 2009 or the first half of 2010 should bring a ray of hope to the gloomy Dubai real estate sector.
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Investment Boutique Market Pulse Q2 2009 - Dubai Real Estate Market Review Download PDF
Source: Safeena Rangooni Lakdawala (Senior Manager) - Investment Boutique
