From flippers to floppers

One has to feel for the now extinct species of property pundits known as ‘flippers’. They came, they saw, they coined it. Now they’ve come a cropper. It’s hard to muster similar sympathy for mortgage lenders — the Oliver Hardy to the flippers’ Stan Laurel — they happily allowed customers to take out multiple loans with cursory credit checks. Now they’ve left us all in another fine mess, scratching our heads and covered in flour.

A few months ago, banks were content to provide multi-million dirham mortgages to customers earning less than 20,000 dirhams ($5445) a month. Now, HSBC bank has let slip that it doubled the minimum monthly salary threshold on Nov 1 from 10,000 dirhams.

The bank claimed in a statement the new credit eligibility criteria “will ensure that customers receive loans that they can afford to repay at a time of considerable uncertainty around the world”.

A few months ago, the same bank offered as much as 90 percent financing on the cost of buying a home. Others pledged to complete deals in 24 hours. Now they wouldn’t risk giving those same customers a loan to buy a bike. It’s outrageously schizophrenic behaviour that only serves to destabilise markets and erode confidence.

International banks were able to reap handsome profits by charging their customers interest rates of eight and nine percent on so-called ‘variable’ rate mortgages, when the prevailing cost of money was less than half that.

They told us their rates were based on movements in the Fed Funds rate, but added in parenthesis and in a smaller font that they reserved the right to ignore it, if they felt like it or if there was an ‘r’ in the month.

The justification for such usurious lending practice and such nebulous terms and conditions, was the “risk premium” applied to fledgling Gulf freehold real estate markets.

Flippers were allowed to prosper because banks and property developers collaborated in a system which encouraged speculation and even required it. It was the ‘get rich quick’ era, during which those with a little money to put up front could see massive returns, based on a property bubble that some seemed to think would never burst. At the same time, the banks and developers were coining it and happy to hand out money and property deeds to anyone who wanted it.

The stage payment method of buying apartments and villas encouraged investors to place multiple deposits on properties without ever intending to occupy them, while banks granted mortgages to customers, aware that they had no real way of knowing whether those same customers were simultaneously applying for another mortgage at the bank next door.

So we had people borrowing beyond their means and a banking system which was happy to gain as much exposure as possible to an industry supported by real estate-backed debt. That does sound familiar.

Sean Cronin is the editor of Arabian Business English.

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READERS' COMMENTS

Landlords won't profit
Posted by Monty on Monday 24 November 2008 at 16:15 UAE time


Sam, landlords won't profit from this for long.

They'll see the costs of their mortgages rising. In some cases they'll be refused remortgaging.

Meanwhile hoardes of expats are leaving dubai. A good proportion of them worked in construction and real estate - industries currently laying off thousands. These people won't sit in dubai and collect the dole. They will have to go home. That means plenty of empty apartments, pushing down rents.

Meanwhile lots of new supply will come online - but with no one to fill them. Rents will collapse.

Flippers
Posted by Sam, Dubai, UAE on Saturday 15 November 2008 at 16:07 UAE time


Good !! finally the property prices will be more reflective of their worth. Landlords will have a party though as it becomes more difficult to buy...

Nov 15....Reality has come to Dubai..!!! Embrace it!!!
Posted by Reality, Dubai, UAE on Saturday 15 November 2008 at 14:31 UAE time


The financial turmoil and the reality of the global economic crisis has come to visit Dubai. The real estate crash that Dubai is experiencing is a \'good thing\'. It will bring order to the region and the market. It may even bring affordable housing to the region if the the downturn is severe. One can only hope. It will discard the really bad RE developers and designers from Dubai and leave the best to survive. Yes, some of the worst buildings that any of us have ever seen may become vacant and unoccupied but they can be remodeled or torn down....or maybe some of the vacant towers can be used for \'labor worker\' housing. I think an \'architectural competition\' should be developed that would present a design brief direction....\"Redesign one of Dubais Empty towers into affordable or \'labor worker\' housing.\" and let some of the worlds best architects revitalise Dubai.....Embrace this challenge and learn from it....let it make Dubai a better place to live, work and raise families.

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