Housing cost is a major expense affecting the lives of residents in the UAE. Dubai ranks 23rd and Abu Dhabi 33rd amongst the costliest cities to live in the world for expatriates, according to the Mercer’s 2015 Cost of Living Survey. Both cities significantly jumped up from their last year ranking, [Dubai from 67th position and Abu Dhabi from 68th place in 2014], largely driven by a steep rise in rents for expatriates.

“Highest inflation rate in the past six years”

The human resources consultancy firm surveyed 207 cities across five continents and measured the comparative cost of over 200 items in each location. In May, Dubai’s inflation rate was highest in past six years. Dubai’s consumer price index rose by 4.6 percent annually and 0.6 percent month-on-month, Dubai Statistics Center (DSC) revealed.

The agency added that housing and utility costs made up about 44 percent of consumer expenses, which soared 7.8 percent year-on-year and 0.7 percent since April.

Declan King, Director & Group Head – Real Estate – ValuStrat says:

“DSC found that at employment age, only 9% earn more than AED 14,000 per month, which is enough to afford a modest AED 65,000 one-bedroom apartment. Moreover, if a family requires a small two-bedroom apartment, the household income would have to be at least AED 17,000 per month, to pay AED 78,000 as annual rent. For this reason, some residents decided to opt for sharing accommodation and many others have made the decision to either downsize or move northwards or further to other Emirates to be able to afford a family apartment.”

[Related: Keeping up with accommodation costs in Dubai]

“New tenants at the mercy of market forces”

King explains the current property rent scenario in Dubai, dividing tenants into two groups. The first being the existing tenants, living in the same residence, since at least the fourth quarter of 2013 (just before the Expo 2020 win announcement) and second is new tenants, who have either recently arrived in Dubai or decided to move to a new dwelling.

“The first group has seen their rents increase in accordance to the RERA rental index, which allows a maximum annual increase of 20% ( this is assuming that the current rent is far below the index minimum) and on average it saw an increase between 5% and 10%. The second group is at the mercy of market forces and witnessed an average increase of 25%, over the last 24 months or so.” He further adds that in the last three months, asking rents have stabilized and as more supply comes to the market, rents may face further downward pressure.

[Related: Rent disputes in Dubai: How to file a case]

“Property prices decline, but rents gone up”

Kalpesh Sampat, Director at SPF Realty says that the  property prices that appreciated approximately 50 percent since the start of Arab Springs at the end of 2012 to June 2014, now needs a breather.

He says the market has seen the investors becoming very conservative in the ready segment and most of the cash is being deployed in off-plan spaces. “With higher registration and transfer fees, tighter mortgage guidelines (such as lower loan-to-value ratio, lower second mortgage, stricter criteria), end user demand also started to decrease, resulting in property prices declining. However, people needed houses to live in, so rentals have actually gone up during the last 12 months, while property prices have corrected.”

[Compare home loans in the UAE]

“No rental decline in the long term”

So what’s the forecast for the future? Are rentals going to start easing up for potential tenants?

“We expect rentals to stabilize in the next 12 months and then start appreciating again, but do not visualize a decline from these levels. The demand for new units by 2021 is estimated to be approx 400,000 units, compared to estimated delivery of about 175,000. So we foresee a huge gap in supply, which suggests property prices as well as rents will go up significantly in the mid to long term,” says Sampat.