UAE house prices will continue to rise

Sky-high house prices in Dubai will rocket even further this year as the price of materials and wages drive up construction costs, Egyptian investment bank EFG-Hermes said on Tuesday.

EFG-Hermes said strong demand for property, coupled with a housing supply shortage, was making it easy for developers to pass on costs to buyers, UAE daily Gulf News reported.

"Taking both cost and demand pressures together, we now believe that both off-plan and secondary market prices will rise significantly higher in 2008 than our previous expectation of 5-10%," EFG-Hermes analyst Sana Kapadia was quoted as saying, without saying how much prices would rise by.

"The persistence of labour shortages, strong demand, and the mandatory adoption of green building codes, health and life insurance are likely to raise costs even further."

The bank said the drop in interest rates was adding to real estate demand.

UAE interbank rates have fallen from 4.9% in November to 2.8% today, causing mortgage rates to decline from 7.9% to 5.8%, the newspaper said.

Monica Malek, economist for EFG-Hermes, told the newspaper she expected rental inflation to be negative in Dubai this year.

"Because of negative real interest rates, people are buying houses for investment purposes, [which] adds to rental supply," Malek said.

Of 57,000 residential units expected in Dubai last year, less than 20% have been delivered by September, EFG-Hermes said in September.

Real estate consultancy Jones Lang LaSalle said last month that property prices and rents in the Gulf were likely to rise by up to 20% this year, due to higher labour and construction costs and delivery delays.