Weak UAE real estate market keeps lid on inflation

19 May 2011

Housing oversupply and credit conditions undermine prices

Inflation in the UAE declined for a fifth consecutive month in April, as a stagnant housing market prevented a strong increase in the consumer price index (CPI). House prices are set to fall further.

Data released from the UAE National Bureau of Statistics (NBS) show inflation rising by 1.1 per cent year-on-year in April, down from 1.2 per cent in March.

Core inflation, which excludes housing and food, also declined by 0.1 per cent month-on-month to 2.1 per cent in April, calculates UK investment bank Barclays Capital. This was in spite of food and transport being the biggest drivers of inflation.

Economists say that rents and house prices are the main dampener of inflation. Prices in the housing sector declined by 1.39 per cent year-on-year.

“Given its large weight in the CPI basket, the oversupply of housing units and the subdued demand have resulted in a reduction in rent, which has in turn put a downward pressure on overall inflation level,” says Fahad al-Turki, vice-president of research at Barclays Capital in the Mena region. Housing constitutes of 39.3 per cent of the CPI basket.

Inflation is likely to remain low, with UAE house prices declining a further 25-30 per cent in the coming two years due to a rising property oversupply, according to investment bank Rasmala.

“As for the rent component, trends will be dictated by supply-demand dynamic, which is still tilting towards an oversupply status,” says Al-Turki.

Since their peak in mid-2008, property prices have slumped 62 per cent in Dubai, states a Deutsche Bank report released in February, and 45 per cent in Abu Dhabi, according to Jones Lang LaSalle.

This imbalance is reflected in the inflation figures, which show Dubai’s CPI growing by 1.2 per cent year-on-year, while prices in Abu Dhabi increased by 2 per cent year-on-year.

While oversupply is more drastic in Dubai, demand is sluggish in both emirates, as slow credit growth and negative equity fears undermines investment appetite, Rasmala says.

The UAE’s inflation figures contrast sharply with price movements elsewhere. In the UK, the CPI rose to a 30-month high in April. Bank of England governor Mervyn King blamed value added tax rises, higher energy prices and importing costs for the 4.5 per cent increase.

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