By Shane McGinley
Measure has been introduced to help prevent emergence of another property bubble
The 50 percent cap on UAE expatriate mortgages, unveiled by the central bank earlier this week, will curb rising prices and chances of a new Dubai property bubble, but will hamper efforts to stimulate a recovery in the market, experts said.
The move was part of a circular issued to commercial lenders by the UAE central bank and appears to be an effort to curtail any possible new housing bubble. 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.
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. It is not clear whether the caps are recommendations or mandatory, the source told Reuters.
Expatriates make up the vast majority of the UAE's population of roughly 8m. 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.
“It is good news in the short-term as this will have an effect on prices rising too quickly recently so to curb credit should ensure we have a sustainable property recovery rather than a bubble that will burst,” Mario Volpi, head of residential sales and leasing at real estate agency Cluttons, told Arabian Business.
“The long-term effect remains to be seen as the region is generally cash rich so leverage is not a major factor in buying property here, although a lot of transactions recently were by expats buying a property to get away from wayward landlords who are doing all they can to increase the rents. So short term happy, long term not so sure,” he added.
The circular was issued to banks on December 30th said Jean-Luc Desbois, managing director of mortgage brokers Homematters. “Without the Central Bank providing its rationale behind the decision, it is still too early to make a call. If the lower loan-to-value ratios are implemented, it will have a negative effect on the real estate market and house prices. However we understand that the banks are actively engaged in discussions with Central bank and expect to receive a more positive communication over the next week,” he added.
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."
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.
Gaurav Shivpuri, head of capital markets at consultancy Jones Lang LaSalle Mena, said about 30 to 40 per cent of home and commercial property sales in the UAE were through mortgages. Bankers estimate about 60 to 70 per cent of mortgage customers in the country are expatriates.
The suddenness of the circular raised questions over whether the central bank was coordinating closely with other parts of the government.
Abu Dhabi's state tourism development company, TDIC, signed a deal with Abu Dhabi Islamic Bank earlier in December to start offering investors 100 percent mortgages of up to AED30m (US$8.2m) for purchases of luxury homes on the emirate's Saadiyat Island, local media reports said.
It is not clear whether the new mortgage rules will be strictly imposed; the central bank has previously tried to regulate the lending of commercial banks, only to back off after the banks protested.
The news has already had a negative impact on the industry, with shares in Dubai’s Emaar Properties, the developer of the Burj Khalifa, dropping 1.1 percent, with declines also seen in property companies Drake & Scull International (DSI) and Deyaar Development.
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Specualtion existed as banks were offering ZERO LTV mortagages in the past.
With a 20% downpayment and penalites for early selling, speculators were driven out.
Prices were rising in Dubai as it reflected confidence in the market and liquidity, as they are in the US with improving job market .
If the CB was looking to the long term , they should review bankruptcy laws, credit beureau/ratings, lowing mortgage rates to reduce default risks etc.
As it stands , this ruling seems to have been taken as a knee jerk response. It will kill the markets in Dubai and Abudhabi except for low end apartments , which will be cheaper to afford.
All great cities in the world need a thriving real estate market. The market supports agents, contractors, architects, maintenance jobs, interior designing , furniture shops etc.
It will keep money in the UAE, rather than sending remittances to UK, India, pakistan etc..
This makes sense considering the apparent new laws that bouncing cheques shall be a civil not a criminal offence, and given that the nature of the expat is transient. We can't have it both ways.
The banks have to minimise their risks, and by capping liabilities to 50% of the property value they should be able to recover on any potential default. Itâ€™s similar with car loans requiring a 25% deposit by law, to cover depreacition in value and default.
It will also take the steam out of the housing market that is allegedly occurring, and may make property more affordable to those trying to enter the market with a reasonable deposit, as home owners, before the speculators highjack the system for short-term gain again.
It's not clear this and it's not clear that... so? Back to point zero. Why do they have this need for keeping things unclearly said?!
Given that only some 35% of property purchases are through mortgages I fail to see the logic of this initiative.
My opinion is that the growth of the property market is supply driven. To curb a future property bubble it would make more sense to restrict building permits or tax such. This would be the best way to control development, keep prices high as taxes on developers will need to be passed onto buyers in the form of higher property prices.
As a member of the Real Estate industry (not an agent) I can understand the CB recommending a reduction in LTV ratios especially considering the large increases in the established areas we have witnessed over the past 6 months. I cannot however understand the logic in asking for such a dramatic increase in the deposit amount. From my experience (9 years in the UAE, 8 in the UK) it is generally the speculators that are using cash and who can afford to put this cash down. The end users simply cannot afford 50%. The LTV should be capped at 65/70% if you want to keep the market stable, 50% will only lead to reductions in values, rent increases and ultimately job losses for those in the industry. May common sense prevail.
the capping of 50% to equity will kill the housing mkt - decent apartments & villa's.
If the CB is concerned of default, than they should make bankruptcy laws, like the rest of the world, where bankruptcy is considered a sad reality of doing business, as oppose to cardinal sin which is the case presently in this regoin.
Most expats have had to put down 30-40% deposits to buy in the UAE, 95-100% mortgages are virtually impossible to find for an expat.
50% deposits just make it harder to buy and forces expats to rent, mostly from UAE nationals....
And expats can only buy in limited areas
So a real overhaul of the UAE real estate market where anyone is allowed to buy anywhere and where the financial institutions determine their own risk is what is really needed
However the decriminalising of cheques was long overdue, so I hope this has really happened
This is truly baffling. It is aimed directly at the average end user who cannot get a mortgage for their home now. If you want to prevent speculators, you simply put a penalty on selling before a certain time period so it isn't profitable to flip with a mortgage.
This just clobbers a recovering economy as mortgages are good for maintaining healthy liquidity and are an important part of any mature market.
I think it is a very good move to control the prices of property specially which is increasing with no obvious reason. Same old players who made tons during property boom came out again with same agenda of making maximum with out looking any other interest (Country or economy). Good job from the Central bank this will really help.
A property bubble is created by speculation from investors for investment where the investor flips properties quickly for a profit in an increasing market or due to under supply forcing market prices higher as people want to buy but the market does not have enough to offer. At the moment neither of these two things are occuring, supply is plenty and flippers aren't really operating (backed up by the regions stats) as a high percentage of current purchasers are end users wanting to move into the properties.
I do not see how regulation like is going to prevent a bubble occuring, all this new regulation is going to do is stiffle a slowly recovering market as realistically how many people have a 50% cash deposit to put down as a down payment, very few, especially if up to 70% of the purchasers are actually expats.
In developed older property markets these sorts of unworkable caps do not exist, with good reason, it seems someone is keen on destroying real estate recovery in Dubai.