IMF says price-to-rent ratios have declined; gross yields up in UAE
A mathematical calculation is now making it easier for you to take the call on whether to buy or rent a property in Dubai.
In its latest report, the International Monetary Fund (IMF) states that price-to-rent ratios have declined in the UAE since mid-2014, indicating a healthy correction in the likely overpriced housing market.
In fact, this means that the total cost of homeownership is less than the total cost of renting a similar property in the emirates, particularly Dubai.
Take for example Discovery Gardens. The average price for one-bedroom apartments stand at Dh700,000, while rents average Dh65,000 per annum (pa), resulting in a price-to-rent ratio of 10.76.
In Business Bay, average prices for one-bed units are at Dh1.2 million with average rent at Dh90,000 pa.
The ratio, therefore, is 13.33.
In Jumeirah Lakes Towers, the ratio is at 14.4, indicating a ‘good’ time to buy.
The thresholds, set by US-based real estate marketplace Trulia, for the ratios suggest currently buying is better than leasing in the emirate.
The ratio thresholds set by US-based real estate marketplace Trulia are as follows:
– Price-to-rent ratio of 1 to 15 = much better to buy than rent.
– Price-to-rent ratio of 16 to 20 = typically better to rent than buy
– Price-to-rent ratio of 21 or more = much better to rent than buy.
Therefore, the indicators point to buying than renting.
Besides, the IMF also states that gross rental yields in the country have risen since mid-2014, registering a six per cent year-on-year increase in March 2015.
The Global Property Guide, too puts gross rental yields in Dubai among the highest in the world, ranging between 5 and 7.21 per cent pa.
Property consultancies have also pointed out that the cost of owning a property is cheaper than renting though buyers have to note that the UAE Central Bank has a mortgage cap in place (so you have to pay 25 per cent down payment), while transfer fees are now at four per cent of the property value.
In the report, the IMF further states that the real estate market in the UAE has cooled down after expanding strongly in 2013 and the first half of 2014.
“By end-2014, sales price increases moderated in Dubai and Abu Dhabi, and in March 2015, growth in residential sales prices turned slightly negative in both emirates, in year-on-year terms (based on Reidin data),” it said, citing, slow down due to increased supply, particularly in Dubai; reduced demand associated with lower oil prices and appreciating US dollar; the introduction of mortgage regulations based on loan-to-value ratios and an increase in the property transfer fee in late 2013.
The IMF expects prices to fall further in Dubai, driven by increased supply, but believes limited supply till 2017 will support prices in Abu Dhabi.