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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.
