Home ownership rates in Europe vary from Germany at 53% all the way to Romania at 96% (the USA is 65% and India is 86%). Most of the world owns their own home and they do that because it makes financial sense, even here in the UAE, and here is why. This is a brief summary, for the full guide please visit our website library here.
Reason One – Inflation Proof Investment
Inflation in the third quarter of 2014 in the UAE was 4%, this means very roughly that things (food, fuel, rent, clothes etc) appreciated in cost by 4%.
Inflation means that if you keep your money in a bank account at 1% interest you’re actually losing 3% of that money per year in real terms, as everything else is going up in price but your money stays almost the same. The value of your money depreciates. When you put your money in an asset that also appreciates along with inflation then at least you don’t lose money. Very few banks offer anywhere near 4% interest, so investing in an asset makes sense.
Reason Two – Capital Appreciation
Let us take a real example, a three bedroom apartment on Raha Beach, Al Muneera in Abu Dhabi is about 190,000 to rent and 3.2m to buy. When you buy a home with 3.2m of your own money and the home appreciates along with inflation by 4% per year then you make 4% on your money. If you buy a home worth 3.2m with just 800k (which is the minimum 25% deposit required) and the other 2.6m of debt, and then your home appreciates by 4%, you a get 16% return on your outlay of 800K. Sounds like a trick? It isn’t.
The asset is worth 3.2m – an increase of 4% is 128k. Now whether you own the house outright or you have borrowed to finance it that 128k is added to the equity (the value of the house less debt owed to the bank) in the house, the bank doesn’t get any of it. Your repayment stays the same and the amount owed to the bank isn’t adjusted. This is called leverage. Over five years it would add around 700k to the equity in your property.
Warning – When the market goes down leverage works the other way. Your bank doesn’t take any gains when your house appreciates but also won’t take losses when it falls in value.
Reason Three – Paying down Equity
When you rent your money goes straight into your landlord’s pocket and you get to stay in his property for another year. When the property is yours you either own it outright (so no rent at all) or more likely you have finance on it. The repayment on a 2.6m loan over 25 years is about 152k per year. That is 38k less than the amount to rent the same unit. The best thing about this however is not just the 38k saving per year (but see the Warning below) but the fact that your 152k repayment now goes to paying off your mortgage (adding to your property’s equity).
Now initially not a lot of your repayment goes to paying down the equity. In year one the amount left outstanding on your mortgage only decreases by about 57k but by year 5 this will go up to 67K. The rest is used to pay back the interest to the bank and banks tend to want you to pay most of this interest at the beginning of your mortgage. Over Five years you’d pay off around 300k of debt and 460K towards interest repayments.
Warning: You need to add to this the hidden cost of service charges on the building, on a unit like this they would be around 20k per year, 100K over five years.
Reason Four – Rent Insulation
According to Jones Laing LaSalle (now just JLL) rents in Abu Dhabi over the last two years saw 20-25% increases, and according to Colliers Abu Dhabi is facing a housing shortage of over 50,000 units (that is 20% of total supply). Rents are not going down in Abu Dhabi (unlike Dubai) any time soon. If you own your own home your rent is the amount you’re repaying to your bank every month, and with a fixed mortgage that amount doesn’t change, no-matter what happens to rent and property prices.
Reason Five – Pure Financial Sense
So assuming that everything works as it should your property will appreciate by 700K by Capital Appreciation and you will pay off 300k of debt. Deduct 460k of interest and 100K of service fees and you come out with 440k positive return, over 50% on your 800k investment and you haven’t paid any rent. If your rent is 190k per year over five years that is 950k, and that is assuming no rent rises. The difference between buying and renting is around 1.4m dirhams, and even if your home doesn’t appreciate in value a single fil you still come out ahead by 700k.
This is a brief summary, for the full guide please visit our website library here, or call 800 CPEA (2732) to speak to one of our agents.
Contact our Sales Manager Cristy for additional information or if you would like to discuss buying in Abu Dhabi in person:
Call – +971 50 8004388
Call – +971 50 6145199