Regulation is an evolving process; it may be time for change, again, argues Ed Attwood
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.