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?
“Because there is a flight to quality in terms of location and structure, I think in some locations — particularly those locations further from the centre of Dubai — they will either be stable or show a slight decline until we have a meaningful increase in terms of people in the market place. If we start to see growth in the overall population here all of the sectors will be affected positively but until we see that growth in population we’ll still see some declines in the less-quality property,” says Maclean of CBRE.
The mortgage cap follows other directives aimed at tightening the UAE’s financial system in the wake of the downturn. The central bank in April issued new caps on lender’s exposure to state-backed institutions at 100 percent of their capital and 25 percent to any one state-related entity. The move was postponed pending a review.
UAE bankers are hoping a similar review is conducted before the mortgage cap is standardised. With no prior warning that the regulations were going to be imposed, bankers are concerned about the impact the mortgage cap will have on lending and liquidity.
Last week, local lenders asked the central bank to delay the introduction by 30 days and are said to be planning to speak to it about raising the new loan-to-value lending limits. “It was agreed that the Emirates Banks Association will write to the central bank requesting a 30-day delay for implementation of the circular,” one source with knowledge of the matter told Reuters.
While sources say bankers are generally comfortable with a mortgage cap, most reportedly favour a loan-to-value cap of around 70-85 percent with higher limits for UAE nationals and lower for foreigners.
“Everybody is shocked [at the announcement]. Most banks already ask for a 30 percent loan-to-value but if you tell foreigners they cannot buy a house unless they have a 50 percent down payment they won’t want to buy a house,” one senior banker tells Arabian Business on condition of anonymity.
“They could have restricted the foreigners who are non-residents with a 50 percent cap but not those with a residency. Local banks are likely to be the most affected as they rely on retailing banking and mortgages. Retail is their bread and butter,” he adds.
Others argue that the UAE authorities should look at implementing a mortgage law rather than a cap, which only serves to reduce the liquidity in the property sector, “It will restrict the risks taken in the banking sector but it means the property and real estate sector still lacks the finance,” says Nasser Saidi, managing director of Nasser Saidi & Associates.
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