Kavan Choksi On Real Estate's Uncertain Future

Last April, the Central Bank of the UAE stated that it would hike interest rates by 50 basis points, following the recent decision of the US Federal Reserve. As central banks boost interest rates and the cost of borrowing rises, Kavan Choksi cautions that the UAE's real estate sector is put at risk of a squeeze as mortgages become more expensive.

"I expect another 50 basis point hike from the Fed in June, with at least 100 more hikes before 2023. This aggressive move will almost definitely influence mortgage rates and, as a result, increase monthly payments for those not tied into a fixed-rate mortgage package," said Lynnette Sacchetto, a senior consultant in the UAE's real estate business.

While the increase of 50 basis points was the largest since 2000, interest rates are still "historically low," according to Andrew Cummings (below), Partner – Head of Prime Residential at Knight Frank Middle East. Kavan Choksi advises buyers to start locking in fixed-term mortgage solutions to counter the risks of subsequent hikes due to the increase.

Given how interest rates affect the entire cost of a mortgage, Kavan Choksi expects luxury home purchasers to be among the hardest hit by the rate hike.

Inflation control

Central banks use interest rate hikes as a tool for fighting inflation. However, as continued supply chain disruptions, high oil prices, and Russia's war in Ukraine strain the global economy, inflation has reached its highest level in four decades.

Central banks can slow down purchasing in the economy by boosting borrowing costs and limiting demand for goods, which would help contain inflation. However, this could also result in an economic recession.

Raising the interest rate "would result in increased borrowing costs, prompting customers to spend less and ultimately decreasing the pressure on prices," according to Vijay Valecha, chief investment officer at Century Financial.