House Price Dynamics and the Macro-Economy: An Emprical Perspective of Uae

Introduction

As globalization increases, investors in real estate might need to shift to other markets and begin to develop a better understanding of various markets like the GCC, especially the UAE. According to Abdelgalil and Bakheet (2007, p. 12). Dubai's political and economic stability has recently emerged to be a secure haven for many investors, a shift that played a very crucial role in placing real estate sector on track, mostly the housing section.

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Background of the Problem

Due to security and strategic locality, Dubai has been attracting individuals from different corners of life into a world comprising economic gains, and comfort. Alodayni (2016, p.18,) states that the market of construction and real estate, estimated to be 49.20 billion AED in the year 2016, it is expected to outpace the majority of much-developed nations across the world.

Objectives

Although there is a research that is ongoing to statistically predict the future behavior of the housing dynamics, studies on the demand for buildings is rare in Dubai. In addition, little is done to estimate this demand for housing (Abdelgalil and Bakheet, 20107, p. 21, p. 29). This research tries to fill this gaps between and also elaborate the housing market in UAE. Specifically, this paper tries to examine what drives house prices in Dubai and addressing the external and internal factors that affect house prices.

What Is Unique of This Paper?

This study will explore both attractiveness levels of global investors to Dubai's real estate, and also the major barriers that likely have an influence to various investors when considering an investment in UAE, specifically in Dubai as stated by Alodayni (2016, p. 36).

UAE - Dubai

Dubai has recently recorded a significant social and economic development over a decade. The real estate has been a key driving force in its economic growth. It is only about 6% of the country's GDP that originates from oil income with the most important sector being repairing services and income from trade, which accounts for 27.5% in 2016. Pacione (2005, 2018, p. 46) states that there are also different key drivers in Dubai's economic growth that includes insurance and financial activities, 10.6%, storage and transportation, 11.6%, and real estate and construction, 13%.

Because of increased growth rate, Dubai has a pronounced improvement in housing conditions. Increase in housing prices and retail, and hotel segments really benefiting from the rise of tourist numbers (Alodayni, 2016, p. 59, p. 63).

Literature Review

The housing market has been heterogeneous in terms of various characteristics like the number of bedrooms, size, age, location, etc. In addition, differences in quality may be a challenge to control because of high heterogeneity. Changes in prices of property can also reflect pure price changes in the house quality. Increase in a house price index may result from one of the two factors, therefore identifying huge changes as the bubble may be too misleading if the major driver of the sudden rise is the latter.

According to Abdelgalil and Bakheet, (2007, p. 69), the Dubai Housing markets are seeing development when the economy of the created world isn't progressing admirably. This shows that the development of the part could be supportable later on and that the locale will keep on flourishing, paying little mind to the progressions occurring in different locales. The land area in the nation will proceed to develop and the UAE will progress toward becoming an international center point for the land segment sooner rather than later. This will enable the nation to differentiate its economy a little while later. This expansion will add to the development of the money related markets, and is probably going to be one of the main impetuses behind them

Many approaches have been incorporated in the literature to explain the difference between the two factors, including repeat-sales methods, hedonic methods, and hybrid methods. The hedonic method controls many characteristics of a property and also measuring price changes and price effects of the quality changes. The hedonic model is the only model that enables the creation of an index that really takes into account the house characteristics (Pacione, 2005, p.71).

Hedonic Model and House Pricing

Hedonic model reflects the ease of access to business services and clients in the immediate business vicinity. The closer the building is to the services, the higher the housing price and the further the building is to business services the lower the housing price.

Housing Prices and the Relations with Housing Prices Index (HPI)

HPI measures the change in house prices across market in a country. Just like any other goods, housing pricing are affected by inflation. As the value of money goes down, the house pricing is expected to go up.

How the HPI Will Affect the Macro Economy

Policy makers and economists use HPI in analyzing financial situations and the consumer behavior. This is due to the fact that housing prices are crucial in indicating any upcoming changes in macro-economy.

Summary of Gaps Identified

You can see that there is a connection between hedonic models, HPI and house pricing. In Dubai, It is important that you keep a closer follow up when it comes to HPI as it indicates inflation which is often followed by the fluctuation in demand for currency. This will affect the access of business services, explained in Hedonic Model, which will have an impact in house pricing.

Methodology

Data

The data series that is used in various analysis comprising the CPI, real GDP, exchange rates and also the real house prices. The research based the argument on CPI instead of any other measures of the price level because the bank's inflation mostly refers to a specified CPI (Ftiti et al., 2016, p.139).

All various series are first changed into logarithms. In addition, it is crucial to know if the variable is trend stationery or difference stationary. It is usually done through testing null hypothesis which indicates that all variables contains a unit root.

Economic Methodology

The used approach employs less theoretical demands of the Hedonic model and also uses a common lag for different variables in all equations. Statistics proposed a simplified procedure which requires estimation of "augmented" VAR. Many of the procedures has been termed as a causality test for VAR coefficients. This study shows, a VAR approximated with (k + d), where d represents the largest order of integration in the system and k is a VAR order. Based on this procedure, both nonlinear and linear restrictions will be measured using the so called standard asymptotic theory. Haruna (2019, p. 156) claims that this procedure is always valid considering the fact that b k>d.

''Vt = + Vt-1 + t-2 + evt''

Where Vt=(x1, x2, x3), v, gh are the coefficient matrices, a is a (31) vector of constants, and evt indicates white noise residuals.

Hedonic Pricing Model

This model is used to calculate or estimate how various factors affect the price of a home. When using this model, non-environmental factors are held steady, and any discrepancies remaining in price represents the differences in the external surroundings according to Al Zaabi and Bekele (2018, p. 79). The hedonic pricing model is usually straightforward since it relies on comprehensive data sets and actual market prices.

Advantages of Hedonic Pricing

This model is able to estimate values, based on verified choices, mostly when dealing with property markets with accurate and readily available data.

It is highly flexible and can be adapted among external factors.

Disadvantages of Hedonic pricing

Sometimes this model does not incorporate external regulations or factors, such as interest rates and taxes, which could have an impact on prices.

It captures consumers' or buyers' willingness to pay whatever they see as environmental differences alongside their resulting consequences.

In this study, I will research the use of hedonic pricing to value the prices of housing. In a country, the housing market is seen to be more connected with the entire wealth of a nation. If the housing demand increases it triggers economic growth in various sectors of society (Bagaeen, 2007, p. 86). An investment into a property is usually a big decision that a consumer will have to make since it is both a consumption and an investment decision.

Different consumers always have different bids which they propose, the price is set by the customer or consumer according to what they tend to believe is the right monetary value they are willing to pay by holding onto a defined level of utility surroundings (Al Zaabi and Bekele, 2018, p.93). Through this, we clearly understand that the monetary value of a house is a reflection of the buyer's estimate utility that he would gain from the various attributes the house will offer.

There are two main approaches that contributed to the hedonic pricing model. First was by Lancaster in the year 1966 plus his consumer theory and the second was done in 1974 by Sherwin (Bagaeen, 2007, p. 105). The two approaches were meant to put prices on attributes. The prices were created on the associated attributes and product relationship.

The link between associated attributes and the housing price is used in hedonic pricing theory. The housing theory is split into three sections

N = Neighborhood

L = Locational

S = Structural

Neighborhood

These qualities can be explained as the community services providers such as local security services or water disposal. Other environmental factors such as noise pollution and air pollution will have a negative implication on house pricing i.e. a close by a local factory, air pollution or airport as stated by Elsheshtawy, (2011, p.112).

The value of all houses is set to offer a calculation of assets, amenities, and benefits that come with owning the house. These valuations are undertaken by different people involved in the market including property developers, analysts, real estate agents, mortgage lenders, market assessors and researchers among other specialists (Ftiti et al., 2016, p.124).

Locational

Location of the defined house is very critical and vital in determining its value. The attributes of location may give a little bit more utility to residents, the distance between the resident's workplace and the house as well as facilities like shopping centers, gym, hospitals, distance from restaurants or public transport facilities, distance from schools can be good examples of locational attributes. When valuing a house, the attributes reduce or add the utility amount a resident can get from the house and this will determine the amount the individual is willing to pay after considering the utility amount that he will gain (Elsheshtawy, 2011, p.133).

Structural

These services could be the amount of space inside the house, the number of bedrooms and bathrooms and other attributes like a garage or a driveway.

Empirical Analysis

This study is aimed at shedding light on the effects of housing cost change on all the macro-economic variables. The models are able to solve the problem because GDP growth and price changes are indigenous.

The variables that are used in this analysis are the HPI, LCPI, LGDP and also the exchange rate (Haruna, 2019, p.171). Although, the casual relationship between determinants and house prices are not sufficiently covered in the UAE.

A model that contains the main three variables is usually approximated in the first place. The additional one is given including the current exchange rate in order to make a comparison between the results. So we can see the importance or the need of exchange...