"Rental price trends do not always follow sales price trends," says Better Homes CEO

Ryan Mahoney offers commentary on the relationship between property prices for buyers and rental levels for tenants
By Staff writer
Tue 08 Sep 2015 09:37 AM

Sales prices are driven by a mix of rental yield, capital appreciation, payment plans, available financing, political risk, etc; whereas rental prices are primarily driven by population growth and availability of properties. Renting is not a long-term investment in the way that purchasing is, so all the macro economics have less of an impact on it. In a market like we have now where people are worried about the oil price crash, ISIS, war in Yemen and other forms of instability, the majority of people will not want to make a long-term investment as the future feels unpredictable. Whereas with renting, it’s primarily about the person’s immediate accommodation needs. So as a result, rental rates do not necessarily track sales prices.

The current market is very different from the market crash of 2009 when two factprs were at play:

1) most of the sales market involved off-plan property;

2) and, after the crash the population fell or stopped growing for a period as many expats left the country

The result of these two factors was a quick and dramatic fall in sales prices as people had no way of fulfilling payment plans on properties that did not exist and also the demand for rented property fell as people left Dubai which meant rental prices fell very quickly.

Today’s current market slow down is very different. Most of the property that is purchased is already completed and either owner occupied or rented out as an investment. Also the population is growing and not falling. As a result sellers are, for the most part, not under pressure to sell as they can fulfill their mortgages with the rental income they are getting and so sales prices have been very slow to fall. Most sellers feel it is best to just wait it out even if they may want to sell, as they are making a good yield on their properties. Meanwhile, rental prices have either not fallen at all or fallen very slowly as the population growth continues to absorb most of the new completed properties.

In 2009, we saw a dramatic crash in both sales and rental prices, falling about 70 percent in sales and 30 percent in rentals, with prices bottoming out over about 12-18 months, rising again in late 2011 or early 2012. Interestingly in terms of transactions for brokers, it was a busy time as a large number of tenants moved from home to home in search of lower rents and sellers were ready to sell at almost any price. Transaction volumes were high, particularly in rentals.

We’re looking at a different market from September 2014 to September 2015. Prices have been very slow to fall, and they have only fallen about 5 percent to 20 percent depending on the location. Meanwhile, rental rates have actually had very limited change with some areas falling up to about 10 percent and others actually increasing in rent.

In terms of future sales prices and rental rates, my feeling is that sales prices will be driven by regional politics and economics. This slow down is not a result of over-supply or outstripped yields as we saw in 2009. Rental yields, cost of financing and supply of property is all quite healthy which is demonstrated by rental yields of about 5-6 percent that we saw even before prices started to fall in early 2015. This slow down is all about regional security and politics. People are afraid of this new war in Yemen or ISIL or what the Iran deal means to the UAE. We all talk about these fears and only when we can see things stabilise will most people come back to the market. This is what happened during the many regional wars or periods of instability, from the Lebanese Civil War to the Gulf Wars. This period is no different.

Investors and owner-occupiers are worried about the regional situation and one of two things need to happen for transaction volumes to grow significantly: either people need to see that the path ahead in terms of oil prices, Yemen, ISIL and Iran are firmly under control, stabilised and predictable; or, rental yields need to grow to 'price in' the regional risk. Of course some investors are still buying and taking advantage of the lower prices. It’s likely that they will be the real beneficiaries of this slow down but that route isn't for everyone because most people value security above profit.

Rental rates however will continue to be driven by supply. If there are large numbers of units added to the market in a short period of time, then we will see rents fall in certain areas but other than that rental rates will remain quite stable.

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