UAE remains affordable for residents despite the high cost of living index

The United Arab Emirates’ most populous city Dubai and capital city Abu Dhabi have both moved up the ranking in Mercer’s 2019 Cost of Living report over the span of past 12 months (1). Compared to 2018 report, Dubai has jumped five spots from 26 to 21, while Abu Dhabi has moved up by seven ranks to 33rd position in a comprehensive survey encompassing 500 global cities.

Among numerous organizations specializing in cost of living surveys, Mercer has quite a reputation, and its findings can have broad implications. From a global standpoint, at first glance Mercer’s latest report implies that Dubai and Abu Dhabi are cities with a high cost of living, but that is only half the truth.

The other half

The Emirati dirham is closely pegged to the US dollar, and both the currencies fared well against other floating currencies over the past year. The real estate market continued to stabilize and remain affordable, while the prices of commodities dropped across the Emirates. The consequent effect resulted in a modest deflation, as opposed to inflation. Despite this reduction in the cost of living, both Dubai and Abu Dhabi ranked higher in Mercer’s report due to the fact that the euro depreciated significantly against the US dollar, resulting in a swift drop in the cost of living in many European cities, while dirham was not influenced in a similar fashion. In other words, many European cities moving down the ranking came at the expense of Dubai and Abu Dhabi moving up.

Prabhakar Rao, Managing Director of Gemini Property Developers, believes the reality on the ground is a far cry from what is seen from a global perspective. According to Prabhakar Rao, the UAE currently boasts a healthy economy, offering employment and business opportunities, while multiple commodities are deflating on the back of a strong dirham. According to one estimate, both Abu Dhabi and Dubai have witnessed a year-over-year deflation of 0.9% and 3.6%, respectively, when evaluated as recent as January, 2019(2). The notable inflation introduced into the UAE economy, in the immediate aftermath of VAT implementation in 2018, has since been mitigated by a decline in prices of utilities, oil, transportation and food. Contrary to the insinuation of the Mercer’s cost of living survey, affordability in Dubai and Abu Dhabi continues to be relatively high compared to the likes of London and Paris.

State of real estate

According to Prabhakar Rao, the real estate sector in the UAE has an important bearing on the region’s economic growth and the effect is reciprocal, meaning even a subdued economic shift can send ripples across the real estate sector. Prabhakar Rao believes that factors like the long-term residency visa legislations, encouraging FDI reforms and the upcoming Dubai Expo 2020, in combination with lower cost of living across the UAE, will invigorate the real estate sector by sparking demand among expats and other residents alike. The secondary effect of a decrease in the cost of living is a boost in disposable income, which can promote real estate investments, Prabhakar Rao believes.

The oversupplied real estate market in Dubai stands to benefit from these circumstances, with the likelihood of higher sales volume leading to a new market equilibrium being probable. The rental market is expected to be similarly favourable for tenants as well and, by and large, it is safe to say that the market is brimming with desirable conditions in the lead up to the much-awaited Dubai Expo 2020.

Global picture
Another reputable survey on cost of living carried out by The Economist is slightly at odds with some aspects of Mercer’s, but its essence is similar(3). Both the surveys observe exceptional movements up and down the ranking in 2019. While Hong Kong and Singapore continue to top the table year-over-year as the most expensive cities to live in, cities in the United States climbed up the rankings in 2019 owing to depreciation of the euro against a resilient dollar. As one would expect, the European cities like Geneva and Zurich, with non-euro currencies, are much higher up on the list than their counterparts that have euro based economies. Paris—or “the usual suspect” according to The Economist—has been the only city to feature regularly in the top ten since 2003.

Both Mercer and The Economist have evaluated factors like food, domestic supplies, housing, utilities and transportation, among hundreds of individual products and services, to determine the cost of living. However, both the reports attribute currency volatility as the major cause for drastic changes in the ranking. Perhaps, that explains Abu Dhabi’s move up The Economist’s ranking by thirteen places in just a year.

Domestic picture
Unlike economies prone to political upheaval, trade wars, poor policymaking and hyperinflation, the UAE is indeed a sanctuary. And going forward, oil economics is expected to take center stage in defining a new world order, which solidifies UAE’s position further. But as Prabhakar Rao interprets it, the UAE cities must continue to restrain cost of living below that of big cities like Beijing and London, in order to entice more expatriates and foreign investments, but not at the expense of overall standard of living and infrastructure.


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