Should the UAE reconsider the mortgage cap?


If you’re thinking of buying a house in Dubai right now, there are plenty of reasons to make you change your mind. The dirham’s peg to the strong dollar makes investors from Russia, Europe and China think long and hard about putting their cash in Dubai’s villas and apartments. The trickle-down effect of the oil price slide means GCC investors are holding back. And all of that is taking place against a background of relentlessly bad news, from stock market collapses to government cost-cutting and regional instability.

The good news is that many of the problems that caused the last real estate bubble have been weeded out of the system. In December 2013, in a bid to control the rampaging housing market, the UAE Central Bank imposed a mortgage cap on would-be buyers. Expatriates were limited to borrowing 75 percent of their future home (80 percent for nationals) if the cost was less than AED5m ($1.36m). Even that figure was a concession to the UAE Banks Association, which had baulked at the central bank’s original plan to limit loans to expats at 50 percent.

The move, along with Dubai’s decision to double the transaction fee on sold homes to 4 percent, has certainly worked, making it tougher for ‘flippers’ to make a quick return. But is it time for a rethink?

Middle-income households — recently defined by consultancy JLL as those earning between AED10,000-30,000 a month — have few options when it comes to buying completed homes. If we are to take JLL’s assessment of the value of a middle-income, two-bedroom flat (AED670,000), then it will be hard for any family in this bracket to pull together the nearly AED170,000 needed to apply for a mortgage, especially given steadily rising costs in the UAE.  Unsurprisingly, many are turning to the offplan market, where more attractive financing options exist.

That has taken some of the demand for sales out of the market, leading to a drop in prices. However, those same families still need somewhere to live, so rents have stayed relatively resilient. All of which is great news for property investors, as their yields are healthy, but not so good for the average family, which has to pay hefty rent costs while simultaneously trying to save up enough to qualify for a mortgage. For many, owning a home has never looked further out of reach.

One solution to this could be a re-evaluation of the mortgage cap. By paring back the cap from 25 percent to a more reasonable 15 or even 10 percent, the government can easily breathe new life into a sector that still holds a vital role in the growth of the local economy.

Much is being made of efforts in Dubai and Abu Dhabi to build affordable housing. But the margins made by developers on these types of homes aren’t enough to convince many firms to take this step. And if the people who are supposed to live in affordable housing cannot afford to buy them, there seems little point in going to the effort of mandating developers to build them.

Regulation is an ever-flowing process. Having adeptly taken the heat out of the Dubai housing market two years ago, it may well be time for the UAE Central Bank to ease its foot off the brake.

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Posted by: PKM

I would certainly not advocate lowering the mortgage cap in general. This should be done only for "self occupied property". Under no circumstances an investment property should be given this consideration.

The lesson from the last crisis is to save people from over trading. People must only buy what they can afford to hold and repay in due course.

A higher down payment means that person's tenure in Dubai will be longer which is required before committing for a long term in the country. We need people who are looking for a life in Dubai. We don't need people who are looking for quick bucks and leave the city with dud cheques.

Posted by: Pankaj Shah

But First the authorities need to de-criminalize bounced cheques of less than AED 100,000/- and also force the banks to reduce the fines they impose on delayed repayment. If the fear of going to jail is removed then the market will show an immediate response.

Posted by: Muhammad Malik

"UAE Central Bank to ease its foot off the brake"
This is required in fact.
1. To give a stable, steady and balloon/bubble free life to property sector.
2. To give a change to middle income people to buy property. So that their rental payments which is now drainage for them, will transform to assets, and this will not impact mortgagees cash flow for pay off. As payout of mortgage is half the value of rental being paid (at average).
In any case fixed asset has low risk in bank financing, the asset can be sold easily to another party for bankruptcies. However chances are on lower side, as property mortgage increases monthly cash flow.
From my personal point of view to reduce threshold from 25 to 10 percent would increase the cash flow at any level.

Posted by: Telcoguy

can you explain how reducing the down payment would lead to " stable, steady and balloon/bubble free life to property sector."?

Oh well, it is really reassuring to see that people learnt nothing from the last crash... as it has been the case with all the previous crashes.

Posted by: ddd

I disagree as the family members will also need to have the appropriate repayment capacity from their job income, so for your argument to work you will need to have a big family of individuals working in high income jobs which can all afford a 10% down payment and have the salary repayment capacity. I don't see this happening. With regards to departure, this is a risk always but lets face it, if a crash happens like back in 2008/9 I doubt even a 50% down-payment will help. Plus you will have a lot more to worry about then unpaid mortgages with banks in such an economic environment. Lastly think about this. a 2 bedroom villa/apartment in a more upscale part of Dubai will cost anywhere between 180-220k AED per year to rent. While the cost for such a property is between 1.8-2.5M AED (these are rough numbers) so take your max price 2.5M AED and do a 25 year loan 100% financing at 5% interest. Your yearly payment would be 170k AED... well below the yearly rent. + you are not burning money

Posted by: Fentoni

If there was another crash every % of equity helps, both to the bank who can sell the property to recoup their loan if it's in default and also the owner who will have a much smaller monthly mortgage payment (hopefully avoiding default). So yes a 50% down payment in this instance would definitely help. If banks offer say 90% mortgages and there is a severe downturn resulting in owners defaulting on mortgages then this bad debt will restrict mortgage lending for many years to come. It's better to have a reasonable, say 20% deposit from the buyer to create a long term sustainable lending plan that is robust enough to take in fluctuations in market conditions.

Posted by: Telcoguy

You may disagree, but people have been using figureheads in contracts for quite some time.
Regarding the down payment... it is very simple, a higher down payment means a lower risk in the bank balance. This is simply arithmetic.
Regarding your business case i suggest you consider total ownership cost when doing your numbers, but hey it is your money.
Numbers did not work for me, they may work for you.

Posted by: Ddd

think the cap should stay at what it is for non resident buyers and for return buyers. whilst it should only be reduced for first time resident buyers. think this is will ensure flippers cannot get back into the market but boost sales by a solid margin

Posted by: Telcoguy

Then you would have people buying using family members , plus the risk of "departure" is roughly the same for a first time buyer or for someone buying a second house (this is just an approximation of course, you should check the leverage of the individual)T

Too many people bought property (and not just in the UAE) who clearly should not have done that, I think the cap helps to prevent that.

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