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?
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.
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