Buying in the UAE will always beat renting due to long-term capital gain

The intriguing new Rent vs Buy Calculator created by the real estate platform Propertyfinder caught my eye earlier this month. It compares the total cost of renting with the total cost of buying in the UAE.

Its conclusion is that the monthly cost of buying is presently cheaper than renting.

However useful this calculation is in planning your annual personal budgeting, it does rather miss another very decisive reason for owning rather than renting a home - provided you are looking at a long-term horizon and not merely passing through the UAE for a year or two.

A mortgaged-home, bought at the right time, is by far the best financial investment anybody can make.

Over time all global central banks allow the value of their currencies to depreciate to pay their national debt off in a relatively painless way. This effectively steals from savers whose money falls in value.

But if you own a home it works the other way around. Depreciating currencies also mean asset price inflation is guaranteed over the long-term.

So a fixed asset like a house will rise in value, while the fixed amount of the mortgage used to buy it in the first place will remain unchanged. The gap between the two amounts will be a growing capital gain for the owners.

If, by contrast, you stay renting the same property over this period, you will have paid a similar, or perhaps higher amount according to the new calculator, but you will have precisely no capital gain.

Home owners effectively win a big cash draw, with a free home for life when the mortgage is finally paid off, while renters can only count the fabulous sum that they have lost, just to live comfortably. Buyers effectively get their ‘rent’ back with interest.

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Earlier this year I wrote of a visit to Thailand and lunch with a couple of retiree expat friends who each made a million on their homes in The Meadows, Dubai. They were early buyers in 2003 and sold about a decade or so later.

Of course, the current generation of buyers may not be so lucky - but, remember, those two millionaire expat pensioners had both been owners through the global financial crash and the Dubai real estate bust that came with it.

They just carried on paying their mortgage and waited for prices to recover. As observed earlier, house prices always rise over the long-term because the central banks have to devalue money to balance their books.

Along with many analysts, I reckon we are currently at, or very close to, the bottom of the price correction that began four years ago with a doubling of transaction fees, tighter mortgage lending criteria and an unfortunately timed oil price collapse.

Brent crude topped $80 a barrel while I was penning this article. The UAE as the trading hub of the oil-rich Middle East as well as a substantial low-cost producer is obviously going to benefit, and optimism among local businesses is turning up.

How long before the recruiters are busy again and new staff require accommodation? Those 15,000 new units delivered in Dubai in the first eight months of this year won’t go that far.

Demand will exceed supply and house prices will begin the bullish phase of the typical three-to-four year property up-cycle. It is always a good idea to be in at the start, or even slightly ahead of this cycle, if you want to maximize your capital gains.

That said you should never get too strung out about house prices when you own a house. Given that you are usually buying with a five to f15-year time frame, expect fluctuations in value along the way.

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The best objection to this investment plan is that you do presently require a hefty 25 per cent deposit to get a mortgage to buy a home in the UAE. Not everybody has Dh500,000 lying around to buy a Dh2 million villa.

But if you are ever going to beg or borrow from your relatives, this is time to do it. As a young journalist I slept on a friend’s couch for two years to save up, got a mortgage saving scheme and did some extra freelance work.

People then told me UK housing was far too expensive. Actually it initially went though a boom-and-bust cycle and I was no better off seven years down the line. But 32 years after I first bought that apartment, it would now be worth 28 times my deposit.

Some home owners naturally worry about what happens if they lose their job. The answer is find another one; if you really can’t or it does not provide sufficient income for the mortgage, then rent the house out.

My original decision to move to Dubai came because I was made redundant in London; I then rented out my house to pay the mortgage while I was in the UAE.

Remember, even if you get fired the bank cannot call your mortgage in early unless you start missing payments.

Owning a house might be an additional headache if you lose your job but it does not have to be a financial disaster. It could become a source of additional income if the rent exceeds your mortgage payments, or the source of the deposit on a second property.

My only real quibble with the calculator is that it excludes maintenance, and this can be a significant cost factor to ownership. In the UAE particularly, the maintenance of air-conditioning in villas can be onerous, making apartments arguably a better buy.

But don’t miss the wood for the trees when thinking about buying or renting UAE property. There is solid oak in the capital accumulation that comes with long-term ownership of mortgaged property, and money spent on rents just goes up in smoke.

Peter Cooper has been writing about finance in the Gulf for more than two decades