In the US, Morgan Stanley released a report stating that ‘we now believe that price appreciation for the US housing market will be below 0%…’.
The word mincing notwithstanding, it is astonishing as to how quickly commentary changes to catch up to read the writing on the wall when sentiments start to change.
For years, the narrative was about the paucity of supply. Now, it’s about deficient demand.
Nowhere are valuations mentioned. It is a time-honored tradition that most analysts end up honoring – talking around the issue rather than address what is obvious.
In Dubai, even amongst the frenzy of transactions, as offplan prices fall (followed by a decline in land prices too), commentary remains bullish for the most part. Having a different opinion from the blundering herd, however, is not enough in light of data that has been clearly indicating excess supply for the better part of a year now.
Even as generous incentives to lure new buyers are not proving adequate to keep the price momentum going, developers are looking to private (and more expensive) credit to augment cash flows.
But the strain is starting to show as data points now adjust to recording transactions in the newer communities.
Real estate brokers have a vested interest in cheering the market on, but even in their commentary, there is no mention of valuations in community after community.
That of course works well in rising markets, but we know that as land prices fall, the ‘replacement value’ of the asset also starts to adjust. With rents already moving lower in certain communities, lower land prices will directly affect offplan prices, despite the increasing incentives on offer.
More drops ahead for land values?
The question then becomes how far can land prices fall in the next stage of the cycle? A historical analysis reveals that in the 2014-2020 cycle, land prices fell approximately 20%. In the bull market since then, they have risen five-fold, before a recent cooling off. (The narrative around this seems to be that its either seasonal, or its temporary).
But we know that for all the infrastructural and regulatory improvements, such a dramatic price rise has to be followed by some sort of gravitational mean eversion process. That affects the price that developers will offer their product at going forward.
Factor in a weakening dollar
Add to this the increasing possibility of a lower dollar, and some vague reference to ‘supply chain issues’ when the real issue is stagflation, there is no conclusion other than to suggest that prices have to adjust lower in most residential areas as supply comes on stream at an accelerated pace.
This is good for potential buyers, not so much for speculators and people who have already locked in.
Sensible pricing is coming across asset classes throughout the world, which it always does, and the sun has set on the period of excessive returns in the real estate sector. This is good news for affordability.
It is rarely obvious what is going on inside some boom – markets work in free verse and the smartest of people remain at risk of being sucked into the passions of the moment, as is the case with every boom-bust cycle.
But animalistic sentiment has the rhyming feature of turning coldblooded in an instant, and when it does, the adjustment process is never pretty.
Land prices, for all of its variances across the emirate will now – as they always have – dictate the replacement value hypothesis. It will be of no surprise that commentary around this issue will remain scarce, for the analyst community has never missed an opportunity to miss an opportunity.
