By Sean Cronin
We read with tedious frequency how real estate, that most machiavellian of industries, needs more regulatory policing.
We read with tedious frequency how real estate, that most machiavellian of industries, is in need of more regulatory policing.
Like modern-day snake oil salesmen, the property folk provoke suspicion with their 'state-of-the-art' this, their 'one-of-a-kind' that, and their large ties. But what about the mortgage companies? Who is regulating them? This particular bunch of bankers has proliferated in the last three years as demand for home loans has soared.
The problem is that the 'variable' rates offered by some of the international banks with offices in the region tend not to vary very much - at least not when the Fed Funds rate is falling.
Since the Fed started slashing interest rates last September in response to the emerging subprime crisis, UAE-based homeowners have been waiting with anticipation for their monthly repayments to reduce.
Eight months later and with the Fed rate having been cut on seven separate occasions from 5.25% to just 2%, they are still waiting.
Mortgage holders interviewed this week are scathing of what they see as an inadequate level of supervision and regulation extended over the regional home loans industry.
Some accuse the local units of international banks of selling the sort of mortgage products that simply would not be tolerated in Europe, where those institutions that are supposed to regulate them are based. This isn't just a consumer rights issue.
The potential consequences of an excessive mortgage interest rate environment that does not reflect the real cost of money, could become devastatingly apparent if house price escalation falters here.
Until now the local housing bubble debate has focused on supply and demand - with little reference to the cost of financing. Are we building too many units? Will there be enough buyers? Let's put that to one side.
As the market moves into a secondary phase where transactions are between real people wanting to live in real homes, the significance of interest rates becomes amplified on a massive scale.
If prices drop in a low interest rate environment as they have done in some parts of the UK in recent months, the impact is more likely to be contained.
It might be distressing for people who have just bought homes - but it's not necessarily a big deal in macroeconomic terms.
Rewind to 1987 when UK interest rates averaged about 9.4% - not far ahead of what some banks are charging on home loans in the UAE today.
When house prices dipped then, it led to the collapse of the residential real estate market.
If mortgage-selling is permitted to operate without the same scrutiny and policing that applies to other financial services and if banks are allowed to set rates according to whim, the consequences for the wider real estate market could be grim.
Sean Cronin is the editor of Arabian Business English.
Banks in the UAE seem to be taking no risks and making a huge spread. There are hardly any fixed rate morgage products in the market. With fed rates low this is the best time to lock interest rates however there are no options for that. Some fixed rate options were I heard of were over 10%. central bank must monitor the spread and ensure transparency Most finance providers donâ€™t even bother to mention their interest / profit rates on their website many donâ€™t even share this info on phone and almost all donâ€™t show the final mortgage agreement unless a customer is already committed with a bank and cant get away. the regulator needs to be more active than what they are doing right now. just creating some transparency would be great. if they only just publish the interest rates of all the banks in a table things could become much better. free flow of information automatically regulates the market.
Spread is too high and banks have not reduced the loan rate. Customers who has got deposits as well as loans can clearly see the difference. The deposit rate has gone down drastically where as loan rate remains the same. Dubai real estate is undergoing transformation and RERA is playing an active role, similiary the country requires regulations for mortgage providers so that the end customers are treated fair. Right now those who has borrowed loan with Variable interest rates are waiting!!!!!!!!!! for banks to reduce the interest rate. Every call made to the bank comes with the response that bank is stuyding will let u know. Do we get this response if the interest rates goes up?? Why this unaccepted business practice?? May we request the Central bank to interfere so these banks do not amass wealth .