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.

Speaking to reporters last week, Nakheel’s chairman, Ali Rashid Lootah, said: “the new mortgage cap won’t affect those buying high-priced luxury properties as they will be financially capable of placing a higher down payment, but it will impact the middle class people... it could be restrictive.”

“We expect that this regulation will help control speculation in the UAE property market, however, the severity of it could also hurt the genuine investors and end users as well,” says John Chang, head of consumer banking at Dubai’s Noor Islamic Bank.

“The property market will be pulled down significantly as a result of this regulation. In the short to medium term, prices will come down as the market shifts from a sellers’ market to a buyers’ market,” he adds.

Others fear that a mortgage cap will end up hurting the end users rather than speculative buyers. “Most of the investors who are driving up prices are cash buyers. Investors don’t use mortgages, those are taken by the genuine users,” says Kabir Mulchandani, CEO of Dubai-based real estate investment firm Skai Holdings.

He adds: “If this regulation continues, rents will go up because end users cannot come up with 50 percent. It will lead to more investors owning property than end users.”

That said, there is a feeling amongst some experts that the lower priced end of the market will benefit — a view the stock market appears to back. Take Emaar shares, which are now trading at over AED4, representing a remarkable 70 percent rise in the last twelve months. Back in November 2011, the company announced a strategic move into low-cost housing across the region — beginning with Dubai. At the time, Emaar chairman Mohamed Alabbar told Arabian Business: “We’re talking to a few emirates. I’m going to focus on Dubai to start with. We are talking about [property] of maybe AED550,000 for someone with an income level of around AED12,000 a month.”

In theory, it means those who hope to buy a AED2m home may be forced into looking at far cheaper options, boosting companies like Emaar.

Though other experts argue that just because people can only afford a AED2m home rather than a AED4m home doesn’t mean they will now buy cheaper homes.

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Posted by: Arjun

My friend invested his 100,000 dollar savings into the first installment towards a property in Dubaiiiii & I had a sentiment towards gold & I invested in gold which was trading @ 72 dirhams per gram then. All 80,000 dollars went into it. I was saved by the skin. Though i was never interested in property here, i still have an investment which has grown almost 3 times.

Posted by: Dutchy

I can relate to the Akerman story, was about to purchase a house in Al Furjan after years of saving money. What a bad decision this is for all expats like me and Akerman. The rich are getting richer....

Posted by: Steady

The mortgage cap is a very mature robust step by the central bank it is sensible that only people with commitment and resources step into the Dubai property market, with easy finance you have too many opportunists and wannabe's jumping in and then crying wolf and ranting against the authorities for not protecting them!

Posted by: The Consultant

Having resources and being committed do not necessarily sit together. In fact, the least committed people are likely to use cash, whereas anyone who goes to the trouble and expense of arranging a mortgage is probably intending to hold on to the property for a number of years.

The local market is already vulnerable to hot money flowing in, then being destabilised when it flows out again. The CB's move will at least mean less chance of the banks taking losses if the market does drop, but it will do little if anything to deter speculation. As others have said, time restrictions and/or higher taxes on flippers would be much more effective.

Posted by: Peter Cooper

this would be short-term negative and long-term positive for house prices. Cash investors around the world will see this as an opportunity, both to buy while there are less buyers available and to own in a market where the central bank is behaving like a guardian of stability rather than pushing liquidity into the system (that's most of the rest of the world). Given that cash buyers already out-number those seeking mortgages it is actually more important for the market to keep the cash buyers happy than the mortgage payers. That said this is a bitter blow for those about to buy with a mortgage who can't now do it, and they will lose out as prices go up and rents go up too. But they are the only losers, the UAE housing market will actually gain from this in the longer term.

Posted by: twistedtory

Several points well made. To mitigate against speculators, the Central Bank should penalize all property sales made within two years of property completion/possession. Those without residency visas should face higher minimum deposits.
Long-term residents who wish to occupy their property should face a cap, but a more realistic one of 70-75%. Fifty percent is too high for those of us who earn executive salaries, but, forbid, may be transferred and pay stiff penalties for early settlement, another impediment to mid- to long-term real estate market stability and growth. A comprehensive, mature, well-planned mortgage law is needed, and quickly.

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