Higher land prices continue to put upward pressure on Qatar’s rent inflation. According to the latest Ministry of Justice data, land prices have increased 52.7% since the beginning of the year. This has led to a rise in rent inflation to 7.9% in August 2014.
As described in our recently published Qatar Economic Insight September 2014 report, rising rent inflation is leading to a moderate acceleration in domestic inflation. This is countered by lower international food prices, which are keeping foreign inflation down. Overall, we expect rising rents to cause inflation to rise to 3.4% in 2014 and 4.0% in 2015-16.
What is driving higher land prices in Qatar? As highlighted in our recent Economic Commentary on August 31, the combination of rapid population growth and higher GDP per capita are leading to a strong increase in the demand for housing, pushing up real estate prices. As the population expands and per capita income rises, both a base and an income effect push land prices higher. This is likely to continue over the coming years, in line with the favorable outlook for the Qatari economy.
The cost of land is the fundamental driver for rent inflation. If land prices rise, rents for villas, apartments and office space will also go up to recoup the overall cost to landlords, albeit with a lag. Land prices have been rising rapidly since March 2014, following a lull during the previous eight months. This rise has put pressures on Qatar’s rent inflation (32.2% of Qatar’s inflation basket), which has been accelerating steadily since November 2012. In fact, rent inflation in August was the highest since end-2008. We expect this trend to continue into the remainder of 2014 and 2015, leading to a 4.2% and 5.0% increase in domestic inflation, respectively.
Counterbalancing these domestic inflationary pressures, foreign inflation has been on a downward trend this year as international food prices have been falling on record global food harvests and large stockpiles. According to the International Monetary Fund (IMF), this trend is expected to persist into 2015. Lower international food prices would therefore result in lower food prices in Qatar. We also forecast other components of foreign inflation (clothing and footwear; and furniture, textiles and home appliances) to rise moderately, leading to a 1.1% increase in foreign inflation in 2014 and -0.6% in 2015.
In summary, Qatar’s fast growing economy and rapid population growth are pushing up land prices, leading to higher rent inflation. This trend is likely to continue into 2015 with moderately higher overall inflation. However, there is a risk that higher growth, large investment spending and the growing population could lead to supply bottlenecks in the economy. Under these conditions, domestic inflation could rise more than our baseline projections over the medium-term.