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?
The UAE’s 50 percent cap on mortgages “aims to avoid speculation in the real estate market, now that the market has bottomed out and is recovering. I believe authorities have learned from the experience of recent years and want to avoid a repeat of what happened in the late 2000s, which is wise,” he adds.
The central bank announcement also comes hard on the heels of attempts to prick another gigantic housing bubble, this time in Hong Kong. The city state’s previous property boom reached its previous peak in 1997 — the time of the UK’s handover of Hong Kong to China — before prices slumped by 70 percent until August 2003. In the ten years since then, prices have rebounded by an astounding 240 percent, helped by wealthy buyers from the Chinese mainland, a lack of supply in what is already one of the most highly populated cities in the world, and low interest rates helped by the Hong Kong dollar’s peg to the greenback.
Mindful of the Dubai experience, local officials have tried every trick in the book to rein in prices. In 2010, in a bid to prevent investors making a quick buck from house purchases, the government put additional stamp duty on houses that were sold within two years of purchase. Two years ago, the central bank raised the minimum down-payment for mortgages costing more than HK$7m ($902,000) to 40 percent. Those moves put the brakes on in late 2011, as house prices fell briefly. But in 2012, values rebounded faster than ever, with property rising by fully 20 percent over the course of the year.
In September last year, Hong Kong’s chief executive, Leung Chun Ying, outlined a ten-point plan to cool the market. In addition to the previous regulations, Leung limited the maximum term on all mortgages to 30 years, while mandating that mortgage payments cannot make up more than 40 percent of buyers’ incomes. The central bank also ordered that non-Hong Kong-based investors needed to put down fully 70 percent of the value of the property. Then, in October, officials introduced a fifteen percent stamp duty on sales to non-resident buyers, and upgraded the tax on properties sold within six months to 20 percent.
In Singapore, where private home prices have leapt by 59 percent since 2009 — that’s the beginning of the global financial crisis - the government has tried similar measures. Additional stamp duty has been introduced for some buyers, with foreigners facing the biggest squeeze, while authorities have raised down-payment thresholds and made more cheap land available for developers.
It’s too early to say whether those measures have brought some degree of control to the market, but investors have already shifted their attentions to one less-regulated area of real estate: parking spaces. The average cost of a parking space in Hong Kong is now just shy of $100,000, up 20 percent from a year previously. And with banks actually offering mortgages on parking spaces, even these are gaining interest from flippers — transactions in 2012 were up by 500 percent over the course of last year.
So what lessons can Dubai take from Hong Kong and Singapore? Unless the UAE moves to implement stamp duty, which would be a major break from its status as a zero-tax haven, then its options are few. One option could be to raise the fee that the Land Department collects during every transaction (around one percent), although this would need to be a substantial hike in order to make much of a difference. The central bank could also limit how much each investor pays back, as a percentage of their monthly salary, as it has already done for personal and car loans.
Regulators in the UAE have a fairly limited armoury; as the dirham is pegged to the US dollar, interest rates cannot be raised.
For investors and home buyers however, regardless of macroeconomic policy, confusion reigns for now. HBSC is believed to be giving customers with pre-approved mortgages until the 24th of January to complete purchases. Noor Islamic Bank has confirmed it will honour existing pre-approved mortgages, while others such as Abu Dhabi Commercial Bank and Standard Chartered are thought to be offering differing deadlines to different customers.
Exactly what the position is and what the long-term outcome is, only time will tell.
*Real name withheld