Bursting the bubble?

With house prices in Dubai rising by nineteen percent last year, many have been fearing the return of a property bubble. The central bank’s move to put a cap on mortgages aims to change all that, but is the announcement too much, too soon?

A UAE Central Bank circular issued on 30 December capped mortgages for expatriates to 50 percent of the value of the property.

A UAE Central Bank circular issued on 30 December capped mortgages for expatriates to 50 percent of the value of the property.

In Dubai, the number of real estate transactions almost doubled between 2006 and 2008. According to data from the Dubai Land Department, nearly $900m worth of –— mainly non-existent — property changed hands in 2006; this figure rocketed to $3.8bn only two years later. When Lehman Brothers collapsed in 2008, property prices stood on the edge of a precipice; when Dubai World made its debt standstill announcement to global markets in 2008, they went into freefall.

In retrospect, Dubai’s rollercoaster ride bore all the hallmarks of a classic property bubble — cheap finance, a bulging offplan portfolio, a high percentage of investors as opposed to end users and, of course, prices that were going stratospheric. With values rising by almost 20 percent last year, and memories of 2008 becoming ever starker, the central bank will be keen to nip such inflated growth in the bud.

One of the main reasons behind real estate’s return to form in 2012 is that of Dubai’s safe haven status amid regional turmoil. A government announcement for a multi-billion-dollar tourism and retail development called Mohammed Bin Rashid City in December, coupled with a boost in tourism and retail spending, also helped boost optimism in the market. The upbeat mood in the market and the importance of real estate to Dubai’s economy — it contributed around 13 percent of GDP in 2011 — has led to concerns that another property bubble may form.

The increase in real estate prices has certainly helped lenders revive mortgage lending. Mortgage credit increased 4.4 percent in the second quarter of 2012 to AED11bn ($2.9bn) compared to the same period the previous year, according to data from the central bank.

Mortgages are an important form of financing for expatriates looking to purchase property, accounting for 66 percent of total registered transactions in Dubai during the first quarter of 2011 — the most recent figures available on the Land Department’s website. Foreigners, who account for around 80 percent of the UAE’s population, are major property owners and buyers, snapping up real estate assets worth AED28.3bn ($7.7m) in the first half of 2012.

While a mortgage cap may limit end users from buying, it will take the heat out of the market in the short term, says Craig Plumb, regional head of research at Jones Lang LaSalle (JLL).“It is much better to see two to three years of growth at ten percent than one year of 30 percent because that’s more likely to be followed by a collapse the next year so from that point of view it’s a positive. It’s a good sign that the central bank is taking this seriously,” he says. Property prices are likely to slow down as demand falls in the wake of the regulations, he adds.

Although the Land Department figures show two thirds of property transactions were mortgages, the actual number of people taking out mortgages is lower and therefore unlikely to affect prices, according to Nicholas Maclean, Middle East managing director of global real estate consultants CBRE. “The mortgage buying section of the buying community is relatively small — we think it’s between 20-30 percent — so the majority of the market is unaffected. I don’t see this having a major impact on the marketplace but I do think it’s going to have a stabilising impact on the market,” he says.

But not everyone sees it that way. While the new regulations will ensure that the country’s property market grows at a more reasonable pace than it has done in recent years, they could also hurt its recovery. The speed at which the announcement was made also highlights the risks of doing business in an unpredictable environment.

Article continued on next page

Join the Discussion

Disclaimer:The view expressed here by our readers are not necessarily shared by Arabian Business, its employees, sponsors or its advertisers.

NOTE: Comments posted on arabianbusiness.com may be printed in the magazine Arabian Business

Please post responsibly. Commenter Rules

Posted by: Martin Legeur

the mortgage cap has no effect on any buble in dubai. a buble comes from flipping and anyone who takes mortgage cannot flip, it is who put 10 or 20 % directly with a developer on an off-plan project and then resells at a higher price. lets face reality and common sense, why would someone and buy property in dubai if they cant afford at least 50% and according to studies in the GCC a minority of expats can hold jobs for more than 10 yrs while any mortgage will go to 25 years!!! do the risk and the math.

Posted by: Akbar Kazmi

Good for banks, but Bad for bankers. Any new major developments by developers for residentail or office space will likely be held back as their ability to sell to end buyers will be limited in light of latter's ability to generate 50% cash from own savings. Resultantly, banks will be risk averse to finance projects by developers. Therefore, less new property coming into the market, which is good and will support prices of existing completed property over the long term. This cap also protects banks from loss in case the market prices fall as the "cushion" of protection at 50% is substantial. Bad for bankers in the short term as this will most definitely affect their profit outlook for 2013 and beyond, and to pretect that profit, the banks will shed their retail/mortgage lending staff. Since lending to developers will also reduce, overall staff strength will be re-examined

Posted by: Hisham

The rules are still unclear as to whether this only applies to expats. I have been told a similar thing will apply to nationals as well. Anyone know anything about that? This is a good move by the way, don't buy what you cannot afford, instead, try to find something in your price range. Because at 20% you can always walk away from your "dream home", that's how most expats seem to live here, with that eternal emergency exit door open. And yeah, yeah, yeah, your stay is not permanent, have heard all that before. It still does not mean you can live it up and split once you can't afford your dues.

Posted by: ronnie k

yes. there is a lower cap on Emiratis as well.

Posted by: ronnie k

Any rule or law that curbs excessive speculation is good for everybody.

most small to medium investors and end users will be glad that the speculation fueling sharks will have to think twice before flipping a property.

What is the real reason for the recent rise in price of apartments? It may be that the confidence has returned or it may just be that the combination of rich cash speculative investors and their buddies in the real estate agencies are fueling this..?

Posted by: GK PAI

It is unfair without giving proper notice to change mortgage laws.I am sure authorities here will take the right decision to support all the people concerned.
However this change will not affect the pricing nor will have a bubble effect. The economy is going steady. Rich people around the countries outside UAE is finding it safe to invest in properties in UAE esp Dubai and the prices will go up by another 10-15% in the short term and then will hold. Rents will go up. However not like the previous boom, but in realistic terms.

Posted by: mama


which real estate are you working for? cause i was thinking of buying an apartment for my self and I believe you really can give me fact full ideas ?!!!!!

All comments are subject to approval before appearing

Further reading

Features & Analysis
Trading bricks: The growing popularity of real estate investment trusts in the Gulf

Trading bricks: The growing popularity of real estate investment trusts in the Gulf

Investor interest in real estate investment trusts (REITs) has...

Forgotten fees: the challenge of investing in Dubai property

Forgotten fees: the challenge of investing in Dubai property

Investors attracted to low service charges at some Dubai residential...

Dubai real estate: which way will it go?

Dubai real estate: which way will it go?

In this special report, Arabian Business analyses the state of...

Most Discussed