Home truths

The UAE’s new mortgage caps may not have the effect the central bank is hoping for. Published in The Gulf, April 2013

If Sultan bin Nasser al Suwaidi has his way, by the end of this year it will be that little bit harder for people in the UAE to buy their own homes. The central bank governor is preparing to impose new limits on the amount that anyone can borrow to buy a house or apartment in an effort to prevent a return to the days of uncontrolled property speculation which proved so damaging in the past.

The limits have yet to be finalised, and are part of an ongoing consultation exercise between the central bank and lenders, but expatriates are likely to find them more restrictive than locals. The central bank has proposed that foreigners should not be able to borrow more than 50 per cent of a property’s value for their first home and 40 per cent for a second home. The limits for Emiratis would be 70 per cent for a first home and 60 per cent for a second home.

In response, the Emirates Bank Association, which counts more than 50 local and international banks among its members, has proposed more generous limits. It would like a loan to value (LTV) of 80 per cent for a national’s first home and 65 per cent for a second house; and LTVs of 75 per cent and 60 per cent respectively for the first and second homes of expatriates.

The decision to impose such limits is being driven by the recent recovery in property prices which appears to be picking up momentum, particularly in Dubai. Average residential sales prices there rose by almost 30 per cent in the 12 months to January 2013, according to the National Bank of Abu Dhabi (NBAD), and by five per cent over the same period in Abu Dhabi. At the same time banks have become more willing to lend.

“There has been a recovery in residential property prices since March 2012 as a result of the UAE’s safe haven status and regional turmoil. Financing of property purchases has also become easier with lower rates and better credit availability,” says Giyas Gokkent, group chief economist at NBAD.

Those rises in prices and credit availability have, in turn, raised concerns that another period of ill-judged speculation could be on its way.

“The strong return of residential prices in 2012, particularly in Dubai, has been met with scepticism from some property experts, who felt that the growth was beyond sensible levels,” says Richard Paul associate director of real estate consultants Cluttons Dubai. “Local and international lenders ... have battled it out for market share by offering more attractive terms and potentially boosting property prices beyond sustainable levels.”

In such circumstances, it is unsurprising that the authorities will want to step in to avoid any repeat of the property market implosion that hurt the entire economies of Dubai and Abu Dhabi in 2008 and 2009. However, many of those involved in the local property market say the new regulations miss the target, not least because they do not deal with the issue of cash buyers.

“Regulating first time buyers and second time buyers who are using mortgages to get into the market is not really what’s having an impact. It’s more cash buyers coming into the market which is slightly harder to regulate,” says Matthew Green, head of UAE research and consultancy at CB Richard Ellis. His firm estimates that up to 80 per cent of purchases in Dubai are currently done in cash rather than with the help of mortgages.

In addition, some real estate agents worry that the new loan limits could undermine the health of the local market by forcing first time buyers out.

“First time buyers looking to invest and settle in the UAE are the type of investment that any property market needs. Increasing LTV ratios to unrealistic and unreachable levels will ultimately convince first time buyers to buy elsewhere, perhaps in their domestic markets,” says Paul. “Discouraging investors who look to make fast profits by ‘flipping’ property is a good move, but we cannot lose the first time buyers which form the backbone of our property market.”

David Dudley, who heads up the ?Abu Dhabi office of Jones Lang ?LaSalle, agrees.

“The impact of the mortgage law will be on end users, which is arguably the group you want to be buying houses and apartments,” he says. “It’s not going to stop speculators using cash. There’s a limited sales market at the moment. The mortgage cap will affect the recovery - it will slow down transactions as and when the conditions improve.”

Given Dubai’s experiences in recent years, it is sensible for the authorities to seek some ways to control the market and prevent another cycle of boom and bust. Affordability is one key element of that, as is ensuring that buyers do not take on more debt than they can handle. In that context, mortgage caps will help address some of the potential pitfalls in the market. But the authorities may well find that the LTV limits the need to be accompanied by other elements which deal with over-exuberant cash buyers too.

“It needs taxes and levies on sale of properties or imposing some kind of restriction on flipping a property by enforcing any investors to hold an apartment for a certain amount of time,” suggests Green.

Whether it will prove effective or not, the central bank seems determined to push ahead with the mortgage cap. Its board of directors agreed at their first meeting of the year on 19 February to press ahead with the new rules and, based on the timetable previously laid out by the central bank, they could be in place by September.

Once they are introduced, the main impact is likely to be felt in Dubai, where the property market is now relatively buoyant, rather than Abu Dhabi, which is taking longer to recover. Managing the recovery in property prices in both cities is just part of a wider challenge for the authorities to keep the country’s nascent economic recovery on track and to avoid another bust.

“Dubai has picked up speed over the last year or so. In the coming years the real challenge will be ensuring that growth is managed in a sustainable way,” says one economist at an international bank in Dubai.

If well managed, a vibrant property market could help to fuel that recovery, but if it runs out of control again it could just as easily undermine the wider economy too. As one local real estate lawyer points out, “the property market is all about confidence and growth”.