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Discuss this article (21 Comments)Negative equity, defaults 'now a Dubai reality'
by This email address is being protected from spam bots, you need Javascript enabled to view it on Thursday, 27 November 2008
PROPERTY PROBLEMS: Experts say widespread mortgage defaults on off-plan homes are already happening in Dubai. (Getty Images)
Negative equity and widespread mortgage default is already happening in Dubai, with repossessions also likely, property experts have said.
Banks ramping up interest rates on home loans coupled with falling real estate prices have hit buyers of off-plan property hard as the market cools in the face of dwindling demand due to the global financial crisis.
“The problems of negative equity and mortgage default are now realities in Dubai,” said Matthew Hooton, head of real estate in the Middle East for law firm Ashurst.
Speculators who bought off plan - property yet to be completed - during Dubai’s six year real estate boom are now faced with spiralling mortgage costs as lenders grow increasingly fearful over customers defaulting on payments.
Official figures from HSBC bank published earlier this month showed that the price of top-end apartments fell by as much as 30 percent in Dubai’s downtown DIFC district during October.
Experts believe if growing numbers of homeowners fall into negative equity, there will be a rush to sell real estate.
“Where you get real problems in the mortgage market is when you get the double whammy high interest rates making mortgages unaffordable and dropping house prices,” warned Chris Dommett, CEO of mortgage broker John Charcoal’s Dubai office.
“That would be exacerbated here because most of the population are not from here.
"The incentive to cut and run is greater. If somebody can’t afford to repay their mortgage and house is worth less than is owed, it is a double incentive to walk away because that person is not walking away from any equity,” he added.
Negative equity - a term synonymous with Britain’s housing crash in the 1990s - is when the value of the property is worth less than the mortgage.
Banks in the region are also under fire from leading industry figures over hiking mortgage rates way above the interbank rate or eibor, currently at 4.31 percent, for three months.
Arabian Business revealed last week that banks including HSBC and the UAE’s largest home loan lender Amlak, have hiked interest rates on new mortgages by up to 2 percent and are now charging customers up to 9.75 percent monthly interest.
Ian Albert, regional director at real estate broker Colliers International in Dubai said: “You’ve got this problem where the banks are almost self-defeating themselves.
"If I borrow at 8 percent I need to lease my property at 12 percent, the greater my yield increases, the greater the property value is depressed.”
Albert predicted that although repossessions will happen it was unclear how banks in the UAE are set up to deal with such a scenario.
READERS' COMMENTS
Disclaimer: The views expressed here by our readers are not necessarily shared by ArabianBusiness.com or its employees.
Real Estate realistically
Posted by John on Thursday 11 December 2008 at 09:24 UAE time
Suddenly I wonder what happens to people who may have put money into freehold property and then find that they are jobless. Don't they have to leave the country and what happens to the property ?
Posted by John on Thursday 11 December 2008 at 09:24 UAE time
Suddenly I wonder what happens to people who may have put money into freehold property and then find that they are jobless. Don't they have to leave the country and what happens to the property ?
Have your cake and eat it too
Posted by Philip, Dubai, U.A.E. on Sunday 7 December 2008 at 12:56 UAE time
The problem with the real estate market is that Dubai wants to have the cake and eat it too, for want of a better expression. They want:
1) for you to pay way over the odds for inferior quality construction and finishing, trust me I have been in the industry for 20 years.
2) not really own the land or property, freehold is just a marketing gimmick in the Gulf
3) continue to pay so called maintenance fees which are ridiculously high in order to cover the massive profit margins the developers feel are justified - you buy it and then continue to pay rent in essence.
4) have no rights as a resident you are just temporary because we (Dubai) are afraid of loosing our identity but we want your money and skills.
I for one have refused to invest in what is probably the worlds biggest scam. How would Gulf investors like it if they were told sorry the building you bought in London is not on land that is technically yours and we are charging you fees for maintenance which may increase by 100 percent next year, sounds ridiculous doesn't it.
The market will revive if people are granted real ownership with rights, no extortion (fees), real mortgages at reasonable rates and the properties are sold at realistic prices in relation to the cost of construction, land and location.
Posted by Philip, Dubai, U.A.E. on Sunday 7 December 2008 at 12:56 UAE time
The problem with the real estate market is that Dubai wants to have the cake and eat it too, for want of a better expression. They want:
1) for you to pay way over the odds for inferior quality construction and finishing, trust me I have been in the industry for 20 years.
2) not really own the land or property, freehold is just a marketing gimmick in the Gulf
3) continue to pay so called maintenance fees which are ridiculously high in order to cover the massive profit margins the developers feel are justified - you buy it and then continue to pay rent in essence.
4) have no rights as a resident you are just temporary because we (Dubai) are afraid of loosing our identity but we want your money and skills.
I for one have refused to invest in what is probably the worlds biggest scam. How would Gulf investors like it if they were told sorry the building you bought in London is not on land that is technically yours and we are charging you fees for maintenance which may increase by 100 percent next year, sounds ridiculous doesn't it.
The market will revive if people are granted real ownership with rights, no extortion (fees), real mortgages at reasonable rates and the properties are sold at realistic prices in relation to the cost of construction, land and location.
Self enflicted property pain...
Posted by DG, Dubai, UAE on Sunday 7 December 2008 at 03:27 UAE time
Yes, the property prices have became un-sustainable, yes the credit crises has hit here.
But the single most over-riding cause of property failure here will be the fact that property does NOT entitle you to residency! It is truly stupid to ask people to sign up for a 10, 20, 25 year mortgage, bring the family and then be on 30 day notice to leave the country!
The two laws are directly related and then in opposition to each other.
That plus ruling out the over 60's from retiring here, they have cut so many of the end users out of the buying chain that it'll never work.
I'm sorry be the one to say that Dubai has to play by world rule if they want to sell homes, a home is NOT something you vacate on 30 days notice.
Dubai and the UAE needs to resolve these matters if property ownership is to ever be more than a pipe dream. Give the people some stability in life or they will not buy.
Very simple to anyone who can see.
Posted by DG, Dubai, UAE on Sunday 7 December 2008 at 03:27 UAE time
Yes, the property prices have became un-sustainable, yes the credit crises has hit here.
But the single most over-riding cause of property failure here will be the fact that property does NOT entitle you to residency! It is truly stupid to ask people to sign up for a 10, 20, 25 year mortgage, bring the family and then be on 30 day notice to leave the country!
The two laws are directly related and then in opposition to each other.
That plus ruling out the over 60's from retiring here, they have cut so many of the end users out of the buying chain that it'll never work.
I'm sorry be the one to say that Dubai has to play by world rule if they want to sell homes, a home is NOT something you vacate on 30 days notice.
Dubai and the UAE needs to resolve these matters if property ownership is to ever be more than a pipe dream. Give the people some stability in life or they will not buy.
Very simple to anyone who can see.
Dubai Property
Posted by Bradleads, Surrey, UK on Friday 5 December 2008 at 13:22 UAE time
Look property prices are falling everywhere in the world and Dubai Real Estate is no exception to this. We must also admit that the vaulations were too high and when major financial institutions of the world went bust the ripples would have inevitably led to this condition.
Posted by Bradleads, Surrey, UK on Friday 5 December 2008 at 13:22 UAE time
Look property prices are falling everywhere in the world and Dubai Real Estate is no exception to this. We must also admit that the vaulations were too high and when major financial institutions of the world went bust the ripples would have inevitably led to this condition.
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