On Thursday, the Central Bank of the UAE (CBUAE) announced that it would raise interest rates by 50 basis points (bps), following the same decision made by the US Federal Reserve on Wednesday.
As central banks raise interest rates, the cost of borrowing increases, leaving the UAE’s real estate sector at risk of feeling a pinch with more expensive mortgages on the horizon.
The Fed has been suggesting that it is likely to continue increasing interest rates this year as the bank tries to counter rampant inflation and cool the economy.
“I expect that the Fed will follow in June with another 50bps hike and at least 100bps of more hikes by the end of the year. This aggressive move will most certainly have an impact on mortgage rates and, as a result, increase the monthly payments for those who are not locked in a fixed rate mortgage product,” Lynnette Sacchetto (below), a leading consultant who is recognised as an expert and a thought leader in the UAE’s real estate industry, said.
While the 50 bps increase was the largest hike since 2000, interest rates still remain “historically low,” Andrew Cummings (below), Partner – Head of Prime Residential at Knight Frank Middle East said. The increase means, however, that buyers are likely to start locking in fixed-term mortgage products “to offset the risks of further increases.”
“In the medium-term higher interest rates may help to cool the pace of growth in prices, which will help stabilise the market which will continue to see more steady growth after recent rapid price rises,” Cummings added.
Given the way in which interest rates impact the total cost of a mortgage, luxury buyers of high-end property are likely to be the most severely impacted by the rate hike, Lewis Allsopp (below), the CEO of real estate firm Allsopp & Allsopp, said.
“Luxury, high-end property buyers with loans upward of AED7 million, will be most impacted, which in turn may impact the upper end of the Dubai property market,” he said.
“I predict we will see an increase in demand across the market as buyers look to speed up their buying process to lock their mortgage product, and therefore their monthly payments, in place now, before they increase. People who are sat on the sidelines, or maybe thinking to purchase a property later in the year, may now come into the market sooner rather than later.”
Fighting inflation
Raising interest rates is one lever that central banks lean on when looking to counter inflation. Currently, inflation is at its highest level in four decades, as ongoing supply chain disruptions, high oil prices, and Russia’s war in Ukraine continue to challenge the global economy.
Through raising the cost of borrowing, central banks can slow down purchasing in the economy, reducing the demand for goods and thus, ideally, counter inflation. However, this can also mean that economic slowdown is on the horizon.
Raising the interest rate “will result in higher borrowing costs in turn causing consumers to spend less and ultimately cooling the pressure on prices,” Vijay Valecha, the chief investment officer at Century Financial told Arabian Business on Thursday.
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