UAE said to limit expat mortgages to 50%

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The UAE central bank has decided to limit mortgage loans for foreigners buying residential real estate in the country to 50 percent of the property's value, banking and real estate industry sources have said.

The restriction is contained in a circular issued to commercial banks, the sources said, speaking on condition of anonymity because of the sensitivity of the issue.

Central bank officials could not be contacted for comment.

The central bank's instructions to commercial banks are often issued through circulars that are not provided to the public.

The central bank's move appears to be an effort to ensure that another bubble in UAE real estate does not develop. Property prices plunged by more than 50 percent between 2008 and 2011, triggering a corporate debt crisis in Dubai that forced the restructuring of billions of dollars of debt.

This year, residential prices in parts of Dubai began to recover and property developers laid plans for new high-end projects; the central bank may want to head off the wild speculation that characterised the last property boom.

However, bankers said they were shocked by the circular, which could hurt confidence in the real estate market's recovery and hurt the share prices of property developers and banks.

"They are trying to regulate banks, but are controlling consumers by giving them limited choices," a senior executive at a local bank told Reuters. "It will lead to less investment by end-users."

An Abu Dhabi-based analyst said, "If implemented, this will impact on the real estate sector. After the property market improved, some banks had started lending up to 85 percent on some projects."

The analyst added, "It's positive when we look at the financial and lending perspective, but the question is whether this lending cap is practical."

A real estate industry source said that in addition to the 50 percent cap for foreigners, a 70 percent limit had been introduced on mortgages for UAE citizens. But it is not clear whether the caps are recommendations or absolutely mandatory, the source said.

Expatriates make up the vast majority of the UAE's population of roughly 8 million. Foreigners are allowed to buy property in designated areas; many from countries such as Iran and India have done so because they see the UAE as a haven from political and economic instability in the region.

It is not clear if the 50 percent mortgage cap for foreigners applies to citizens of other Gulf Arab states, who have been keen buyers of Dubai property.

The UAE central bank has previously sought to regulate the lending of commercial banks to reduce risk, only to back off after the banks protested.

The central bank announced in April this year that from Sept. 30, banks would have to obey caps on their exposure to state-linked entities.

Some major banks remained above the limits when the deadline passed, and earlier this month, the central bank announced it was suspending the rules while it consulted further with banks.

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Posted by: Navin

In case the commentators have missed out on this small irrelevant bit, it is the banks who will suffer the most by limiting mortgages to 50% and are naturally the ones complaining the most! i guess it has something to do with them having to lend money to make money and there is only as much you can give to people as personal loans which they do not need!

Posted by: Navin

The only way this 50% cap would make sense to me is when they qualify it applicable to secondary market and not developer sales to prop up the primary market / off plan sales which remain comatose!

Posted by: The Consultant

@telcoguy, yes I am well aware of the property crash, with some areas losing up to 60% from peak. Whilst we have seen a recovery in some areas, most developments still seem to be at least 40 - 45% below peak and IMHO unlikely to see a massive drop in value from here, unless of course something fundamental changes such as dramatically reducing the LTV that most buyers can borrow (oops......).

It's also a bit simplistic to assume that any owner will automatically drop an underwater property. I'm not aware of any banks giving non-recourse mortgages here, but if any are then they frankly deserve to lose money. Assuming the bank has recourse then a buyer would have to consider whether the bank could find them in their home country, whether the bank could get a judgement enforced in that country and if so, if the borrower has any assets they could seize as a result. In short the bank has to do a proper risk assessment and base the LTV on that.

Posted by: Telcoguy

Yes, in your opinion this is unlikely to happen. The Central Bank has a different one, and they need to think not just of today market prices, but (one would expect) longer term

My view may be simplistic, but I am fairly confident that it is widely shared. And certainly no more simplistic than assuming that I will return to Spain. I can give you my own example:
I just opened a bank account and they asked me for an address in Spain. I left Spain in 1995. Since then I have lived in 7 countries before landing here. Still they insist need an address in my country of origin.

Honestly, can you conduct proper due diligence on a transient population like Dubai?

So, to summarize, you have a different take in real estate risk than the Central Bank does. Fair enough, in fact your view may be more accurate. Still, if you are wrong you will not be the one picking up the pieces, you (same as I do) have a put option (the so often mentioned road-to-the-airport). They don't.

Posted by: mama

when they know the property prices are gonna go down this year, they will make this law so the buyers will have to pay 50% cash in so when the prices went down, a buyer will not leave everything and go because he has paid his savings of 50% already so will have to stay and wait and pay the mortgage.... I think its a good move for the real estate market, it will control the prices as well as will not make another bubble,,, but definitely not good for real estate agents

Posted by: Essam

@ SA1, the fact is buying a property does not entitle you to anything other than your property. You are a welcomed expatriate who has a homeland, period! Wake up and smell the coffee and do your homework before crying wolf later. Just in case you feel your homeland is not worth returning to, then may be you actually should to make it a livable place just like the UAE.
As to the mortgage market, there is no doubt that it must be regulated.

Posted by: FormerExpat

@Essam....it's ignorance like yours that leads to erroneous short term decision making like this new mortgage cap. Rather than encouraging people to return to their homeland (which I thankfully did a couple of years ago), perhaps you should be focused on encouraging more people to invest in the UAE. If the government is truly concerned about speculative activity, perhaps the introduction of a functional credit monitoring and reporting bureau would have been better. This would serve to ensure people (expats and locals) don't assume too much debt and people aren't buying multiple apartments as investments unless they can truly afford to do so.

As for your comment on price depreciation, this has happened in every market around the world, and the credit losses for defaulters was borne by the banks. I am not aware of any other market where the government has interceded to dictate credit policies to the banks. Surely even the overpaid bankers in Dubai can figure out their credit polici

Posted by: Telcoguy

@Essam, I could not agree more with you Essam, and that is why for a long time I have wondered why people would like to get into a long term investment here. This new regulation at least is consequent: if you do not want to protect foreign investors rights it makes sense you make it difficult for foreigners to invest here. I for one welcome it
@TheConsultant, yes it is relevant. Ideally people would act the way you describe. But recently we have seen drops in value of up to 50%, maybe more. Furthermore, as most models failed to recognize, prices did not move in isolation. So when market tanked you had a drop in value, people leaving their cars at the airport, and leaving an unsellable property to the bank. This was an ugly mess, have we forgotten?

And no, banks are not OK because they have collateral for the loan. Becoming a landlord is not the bank's business. I am really surprised by so many people's reaction to something that to be fair is quite a rational decision.

Posted by: Stephen

It's comment such as yours and that from Basma that colour these forums so badly. Most of us can't be bothered to answer but occasionally someone has to, if only in a vain hope that you may reread what you have written and reconsider.

I sincerely hope that more people read them and understand what idiocy and flat headed ignorance abounds. What possible purpose could there be in investing in anything in this country when attitudes such as yours are so commonplace.?

Posted by: The Consultant

I don't see the relevance of expatriates limited/uncertain residence in the UAE to this decision. When it's time to leave you can either sell the property or keep it as an investment and rent it out. You don't have to live here to be a landlord and you don't have to walk away from a property and a mortgage just because you have left the country. At the current market prices a LTV ratio of 70 or 80% should be enough to ensure the banks don't lose out if someone does end up defaulting.

As other posters have said, this will kill the market for genuine end-users whilst doing nothing to deter the speculators and flippers that drove the market up the last time. These people use cash, and even if it's borrowed money it's not by way of a mortgage.

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