United Arab Emirates: Wednesday, September 15 - 2004

Comparing Dubai and UK house prices

One way of telling whether prices are high or low is to compare different markets. So what does an overview of Dubai and UK property tell us about valuations?

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Take a typical South-West England market town like Salisbury and compare the housing market to Dubai. In Salisbury you can rent a substantial family home for $2,900 a month. A similar five-bedroom villa in Dubai might be $3,100 per month. So the UK just about wins on rental costs.

But try the same comparison on house prices. In Dubai the villa in question would cost $550,000 while in Salisbury the rental house in question was on the market this summer for $1.4 million.

Why is it that a rental yield of 2.5% is acceptable in the UK, while in Dubai the rental yield is 6.8%?

This is certainly not a question of the cost of funds. The Halifax mortgage rate in the UK is 6.75% while the Amlak Finance mortgage rate in Dubai is slightly lower at 6.5%.

The obvious conclusion is that either UK house prices have gone far too high, or that Dubai house prices should be a lot higher. And perhaps the truth is somewhere in the middle, which is about where a place like Singapore sits at the moment.

At current rental yields Dubai property represents a very solid long-term buy as a rental property will cover its mortgage payments from Year One.

In most markets this is not the case for up to five years, and in the case of the UK things seem to have gone seriously awry as the cost of a mortgage may never be met by the rental income alone.

Now there are those who argue that buying in Dubai is somehow more risky than buying in the UK. Obviously we have only to look as this simple rental yield demonstration to prove that this argument is completely fallacious.

The idea that the UK is politically more stable is also easy to dismiss. Democratic politics mean that housing taxes, for example, can change overnight, and do not have the assurance of a stable regime as in the UAE. The same argument can also be made about the law of the land, although the UAE still has some legislative catching up to do in this department.

So what is supporting extremely high house prices in the UK? On closer analysis, the answer is nothing much more than a widespread belief that prices will always go up, the classic investment bubble scenario which just feeds on itself.

Unemployment is low in the UK, but then it is non-existent in the UAE and general income levels among house buyers are higher and not lower. It is only the general level of confidence among the general public of Dubai that is different to the UK. In Dubai there are still a lot of skeptics who constantly imagine the worst rather then facing reality.

This will change as house price levels gradually increase in Dubai and as more and more nationals and expatriates buy property, whereas in the UK a reverse downward spiral looks inevitable. Even the Bank of England is warning homeowners to beware of falling prices, not something likely to support the market!