At the high end of global housing markets, there has been some extraordinary movement.
It’s been of some curiosity that eye-popping valuations have received considerable headlines, but when the same or similar properties have seen discounts, they receive very little coverage.
For example, in New York’s ‘Billionaire’s Row’, there was a transaction that sold for $48 million, down from an asking price of $70 million listed before President Trump’s tariff tsunami. The sharp fall could be a one-off, but when the data is examined, there are plenty of such transactions that indicate pricing generally has increased far greater than the rise in construction costs and/or that of inflation.
Dubai land values
Of course, land prices have increased dramatically in these areas, but in the past, it’s been land values that have been the most volatile in the prime luxury market. And this is where there has been some softness, accompanied by a marked increase in supply, to the point where prices in Dubai’s Palm Jumeirah and the Downtown have started showing price drops.
With newer luxury communities popping up, there has been greater choice available. But land prices have shot up in these areas (fueled by easier lending, especially in the villa space). So, the worry always has been that the long talked about shortage has disappeared and replaced by the uneasy paradigm of relying on a demand curve that is projected to move inexorably higher, as Dubai tilts increasingly towards offering a higher base price.
Developers have resorted to private credit, with the curious effect that the higher the borrowing cost, the higher is the transacted price. Even though mortgage rates have not moved higher by anywhere close to the same amount.
Return on equity gets squeezed
We know it is the job of developers to build, and that they will continue to do, but the marginal return on equity has clearly declined to the point of becoming negative.
As a business, this implies that more and more capital is tied up in the business, which is the opposite of where investments should be allocated.
Ideally, the marginal return on equity should be high, where very little capital is required, and such is the case with companies like Salik, Parkin and Dubai Taxi. And even more so as markets brace themselves for inflationary times.
The spin on the commentary is the exact opposite, where the general consensus remains that luxury real estate is the place to be and that ‘replacement value’ holds little water for a segment of the market that is not reliant on economic forces but rather geopolitical ones.
But land values, supply, and increasing incentives in the Dubai luxury property space all point to tightening conditions where statements like ‘there are very little homes available on the shoreline indicate that discontinuous pricing is the likely path forward in the next few months. (Such statements also forget the fact that some of the priciest communities like Emirates Hills and Dubai Hills are not on the coast…).
Markets reflect consumer preferences and people should pay to live wherever they want. But as we have seen even in past cycles, sentiments change on a dime. When they do, land values drive prices higher as well as lower.
With high prices already reflecting exuberant expectations of a population influx tilted towards the high-end, there is a case to be made that more people would revert to adopting a defensive approach. Some have personally stated that for these prices they would rather stare at bath tubs rather than the ocean, bringing a curtain call to the runaway pricing and setting the stage for a recalibration.
