House prices jump as interest rates fall

Last week the US Federal Reserve cut interest rates = to 2%, an=20 action quickly followed by the UAE Central Bank, as the currencies = remain=20 pegged.

United Arab Emirates: Sunday, May 04 - 2008 at = 09:56

Low interest rates are attracting increasing = investment=20 from Europe

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But falling interest rates have already put Dubai = house prices=20 in an upward spin this spring, with 10%-15% increases in asking prices = across=20 the board. However, prices are already going much higher.

The = so-called=20 'carry trade' used to be something for hedge funds. It sounds = complicated but=20 the idea is simple enough: you borrow cheaply in one currency and invest = that=20 money in another that gives a higher return.

Now the same = principle is=20 being applied to Dubai property by an increasing number of foreign and = local=20 buyers. Moreover, because the US dollar is pegged to the dirham you have = no=20 currency exchange risk. In fact, your only currency risk is a = revaluation which=20 will make your house in Dubai worth even more in dollar terms. =

The=20 authorities have dismissed the idea of a revaluation for the time being, = although the current resurgence of the US dollar - from a very low base = - could=20 cause them to revise their plans as a revaluation could be accomplished = now with=20 little negative impact on the greenback.

Dollar resurgence

But the resurgent dollar will likely be a = further=20 prompt to foreign buyers, especially from Europe and, increasingly, = Russia.=20

The US dollar bouncing back makes Dubai property investments = rise in=20 parallel in euros and rubles.

However, the carry-trade argument = for=20 buying is stronger than fears over the US dollar, which could well = resume its=20 collapse this autumn. Indeed, it is hard to see the current financial = crisis=20 coming to a sudden and neat end - the average duration of past financial = crises=20 has been three years, with the greatest suffering for investors usually = coming=20 in the latter stages.

Dubai property with its 6%-10% rental = yield looks=20 an excellent buy in a world of 2% money. Of course, borrowers generally = have to=20 pay more but cheap money is definitely back. Look at the 4.3% Nakheel is = paying=20 on its latest issue of Islamic bonds.

Prospective buyers should = also=20 realize that this downward shift in borrowing costs takes time to work = its way=20 through the system. Local mortgage rates, for example, have not moved = much=20 recently.

Interest rates

But as the ultra-low US interest rate persists - = and it=20 could go to 1% or even 0% if the financial crisis lasts - then UAE borrowing costs will drift = lower and=20 lower, and carry trade money will appear in the market.

This is = bound to=20 stimulate yet another round of investment in real estate in search of = higher=20 yields in the case of completed property, deposit inflation in off-plan=20 developments and price inflation for land purchases.

Prices that = look=20 attractive today could be out of reach for many by the late autumn as a = house=20 price spiral takes off fuelled by lower and lower US interest rates.=20

That could even prove to be the economic force that breaks the = dirham=20 peg - but then property owners would love that one-off boost to their=20 investments, at least in US dollar terms.

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Peter J. = Cooper,=20 Consultant Editor
Sunday, May 04 - 2008 at 09:56 UAE local time=20 (GMT+4)

Replication or redistribution in whole or in part is = expressly=20 prohibited without the prior written consent of AME Info FZ LLC / Emap=20 Limited.

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