Bursting the bubble?

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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.

“We have to find other ways of financing a very important sector for the UAE economy and this [move] hasn’t answered that question,” Saidi adds. “The answer is through the development of a proper mortgage market; the securitisation of loans and specialised mortgage lenders.”

But the decision by the UAE central bank to implement a 50 percent cap on mortgage lending to foreigners is not unprecedented.

Take Lebanon — there, the banking system and economy thrived as the global economy slumped largely because its central bank governor Riad Salameh regulated the activities of banks, with measures adopted as early as 2001 and 2004, banning them from investing in derivatives, foreign structured products and thus helping avert a similar pattern to the unfolding subprime crisis in the US.

The Lebanese central bank also implemented a cap on mortgage lending forbidding Lebanese banks to finance more than 60 percent of the value of the property being purchased in order to avoid a speculative real estate market and bubble.

“The Central Bank of Lebanon’s decision was meant to put discipline among developers and avoid speculation by ensuring that developers are building projects on a sound basis rather on having access to easy and cheap funding,” says Nassib Ghobril, chief economist at Byblos Bank in Lebanon.

The Lebanese central bank took this measure during the property boom in the country which was spurring economic growth and though its objective was to curb any potential speculative behaviour by developers it did not help move the market towards rental, Ghobril says.

About 90 percent of residential demand is from Lebanese nationals while foreign demand accounts for ten percent. Foreign demand has been decreasing. In 2011, the number of sales to foreigners dropped by 20.3 percent, after rising an average of ten percent per year, during the previous five years. Lebanon registers between $7bn and $10bn in annual real estate transactions.

“During the boom years the intervention of the central bank was to limit people just borrowing money to speculate,” says Raja Makarem of Ramco Real Estate Adviser.  “Definitely it’s the role of the central bank to limit the speculation. In Europe, it could go up as far as 100 percent and this is what damaged the international real estate market — the over borrowing. Putting limitations on how much one can borrow definitely does influence and control the extent of speculators.”

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