How Dubai can pass the affordability test

Nakheel's Discovery Gardens was often cited as a successful example of affordable housing in Dubai. But prices have now gone up in the community as well.

A friend and I were in the back of a cab recently discussing his housing needs. His serviced apartment lease was soon coming to an end and he was considering options. He loves the Lakes and the Meadows but unfortunately, they are beyond his budget of Dh180,000.

The driver was bemused. "Why would you spend Dh180,000 renting when you can buy an apartment for Dh350,000," he asked.

Of course, the driver was right. While I can't see my buddy squeezing his wife and dog into a studio, our eavesdropper got him thinking about buying. But how difficult is it?

Housing affordability is a global topic. There are 'rent forever' generations emerging in cities around the world. Governments have tried to address this issue with first home buyer cash grants, purchase cost exemptions and subsidised saving plans. The challenge is to implement policies that assist first-time buyers without excessively devaluing or inflating existing property prices. Tricky.

The UAE government has often spoken of the need for affordable housing developments as part of its vision for the future. Nakheel's International City and Discovery Gardens are often cited as successful past examples.

But, what does 'affordable' mean? Is it the price per square foot compared to elsewhere or is it the ability of the population to buy? In Dubai, the latter remains the challenge.

Affordable options
A quick search on propertyfinder.ae and you'll find studios for Dh300,000 in International City, Jumeirah Village Circle, Dubai Investment Park, Dubai Sports City and Living Legends and a two-bedroom apartment starting at around Dh700,000. In Dubai Marina, studios start at Dh500,000 and a two-bedroom apartment at Dh1 million.

If you don't like apartments, there are several upcoming developments along Al Qudra Road on either side of Emirates Road which are targeted at the mid to lower income family segment: Emaar's Reem launched with a starting price of just Dh999,888 for a three-bedroom townhouse in 2014. They are now available on the secondary market from Dh1.25 million! Nshama launced Town Square with large three-bedroom townhouses from Dh1.3 million and Dubai Properties' Mudon with two-bedroom townhouses are now available from Dh1.15 million.

All of the above are cheap by international standards, but are they 'affordable'?

Salaries can vary considerably in Dubai and affordability depends much upon your personal circumstances and your perspective. If your salary is under Dh10,000 per month, Dubai looks expensive and even if you can get together the money for the 25 per cent deposit plus seven per cent in fees, most banks won't grant you a mortgage as your salary falls below their minimum threshold. Lending policies such as this make Dubai unaffordable for this section of the population.

At the other end of the pay scale, Dubai's tax-free salaries for senior executives continue to be among the highest in the world and Dubai property prices are a fraction of what is paid per square metre in cities such as Geneva, Sydney, London, Paris, Monaco, Singapore, Hong Kong and New York. For those at the top end, Dubai seems affordable but upon deeper investigation, you realise that your upfront cash requirement is substantial.

Joint responsibility
Affordability is not only in the hands of developers, the Central Bank can help with a change in the mortgage cap policy that demands a 25 per cent deposit for a first property purchase for expats of up to Dh5 million and 35 per cent over Dh5 million. Introduced in January 2014, the mortgage cap helped avert another 2009-style property market crash but is now the biggest obstacle for buyers to step into the UAE property market across all income brackets.

Off-plan may be an option for those with insignificant funds to buy completed property. 'Book now with 10 per cent' is a common hook but payment plans vary from 20 per cent to 80 per cent during construction. Mortgage cap restrictions limit the amount you can borrow at completion to just 50 per cent of the purchase price. So, regardless of the payment plan, you need to save 50 per cent in cash while renting. Not easy.

If the ultimate test of affordability is the ability for people to buy, two things need to change if Dubai is to become more affordable.

Firstly, banks should fund developments, not buyers. In more mature markets, a developer typically needs to secure pre-sales with 10 per cent paid deposits for half of the project to secure construction finance. Their bank then releases funds with clear construction benchmarks. The buyer pays no more until completion where they mortgage 80 per cent to 90 per cent of the original purchase price. If the project is delayed, the buyer has just 10 per cent tied up.

Secondly, the Central Bank needs to adjust the mortgage cap for first-time buyers who plan to live in the property. If it were possible to buy with a 10 per cent to 15 per cent deposit, thousands would choose to buy instead of renting.

The impact of such changes would mean a drop in rents and an increase in property prices across the city. Additional measures would be needed to discourage speculators who have distorted the market in previous cycles. An increase in transfer fees payable by sellers that reduce each year the property is held (in additional to the two per cent payable by the buyer) would also be necessary.
 
The writer is CCO at propertyfinder Group. Views expressed are his own and do not reflect the newspaper's policy.