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Mid-income families face shortage of affordable homes

Posted by Coast Sea on December 29, 2015
Hussain Alladdin/Insight
Filed on December 23, 2015

Given the median income of the average household in Dubai, most freehold areas are inaccessible from either a rental or a purchase perspective.

¬†Amidst all the sound and fury surrounding the new zeitgeist of “affordable housing”, what has been left unsaid has been what exactly defines the concept of the term.

As real estate markets have softened, developers have rushed to offer affordable options and analysts have been puzzled when these offerings have been met with a tepid response.

To understand the dynamic of softening demand, a prerequisite criteria is to comprehend the definition of affordable housing. Developers in many instances have reduced the size of units (by as much as 20 per cent in the last two years) as a way of reducing the ticket sizes of the units, rather than reducing the price per square foot of the units.

This has resulted in prospective end-users not finding new offerings attractive.

A critical analysis of the mid-income segment reveals some trends: 1) The density of freehold areas is far less than that of leasehold areas (average density per unit in freehold areas is a paltry 1.12 compared to 5.82 in leasehold areas; this implies that leasehold areas are more conducive in attracting the mid-income populace 2) Given the median income of the average household in Dubai, most freehold areas are inaccessible from either a rental or a purchase perspective.

What is starkly evident is the paucity of choice that the mid-income household faces. For the most part, the choice in freehold areas is limited to studios and one bedrooms, and that too, in areas that are currently far from developed.

Despite the slowdown, there has been resistance on the part of developers to cater to this dynamic, barring a handful of exceptions, and consequently this demographic has not yet jumped on the bandwagon of purchasing into the freehold phenomena.

The path of homeownership is critical for the development of any major country. Studies suggest that high rates of homeownership contribute upto one per cent growth to annual gross domestic product numbers. A strong homeownership society fosters an environment of stable population which, in turn, has benefits of stable capital formation in sectors of the economy.

What does this imply for the market going forward? Firstly, expect a further influx of “truly affordable options” which offer space as well as reduced price per square foot options to this populace.

Secondly, contrary to recent suggestions, affordable housing develops best when developed organically through private sector initiatives. It is true that in most countries, there has to be some sort of government incentives for the same (and it is heartening to note that government officials have recently made announcements for the same being considered in Dubai), but it is equally true that empirical evidence suggests that this sector has developed best with minimal government intervention.

We expect that the proliferation of such options will be in areas such as Dubai South and the Shaikh Mohammed Bin Zayed Road corridor, and it will proliferate the longer the current environment lasts.

It is imperative to any observer of real estate markets that a viable affordable housing sector is essential to the overall growth of the economy and the real estate sector itself.

Dubai’s problem to solve has been a problem that few others have solved in the past. However, it is a solution that will not occur due to incorrect definitions. A framework that truly addresses the needs of this demographic is the best and only way forward. In the absence of this framework, affordable housing will remain a contradiction in terms.

The writer is the head of research, GCP Properties. Views expressed by him are his own and do not reflect the newspaper’s policies.

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