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When the latest set of new regulations on mortgage lending were implemented, many industry analysts were of the opinion that the reduction in the level of leverage and the increase in the required equity in a property transaction financed by a mortgage were not likely to have a great impact on the amount of speculation in the market. These opinions were based on the fact that the majority of property transactions were being settled in cash.
The latest figures from DLD have confirmed what we have all been surmising, that despite being 4.6% higher than the corresponding period in 2013, the property market in Dubai in the first six months has been slowing, with the second quarter producing Dh52b worth of transactions, down 15% on the Dh61b written in Q1.
The slowdown can be attributed to a number of factors: capital inflows seeking a safe haven were sure to weaken; alternative investment opportunities were sure to emerge as prices started to rise; the implementation of the 4% transfer fee and the developers’ proactive attempts to limit speculative practices had an initial effect; the new law regarding rental price increases also had an effect; some investor nervousness and trepidation have led to hesitancy in buying into a market that they feel is at its peak. Add to the list the implementation of the new mortgage laws, and there is a compelling suite of probable reasons for the slowdown.
The regulation of mortgages is interesting partly because the supply of mortgages is an industry in itself which is inextricably linked to the growth and contraction of mature property markets around the world. One only has to look at the current rush by financial institutions to capture a higher market share of the mortgage market to understand that providing mortgages is a lucrative business. Yet, of the 30,380 real estate transactions in Q1 2014 in Dubai, only 6,922 transactions were financed by mortgage. This is a worrying continuation of a trend as, according to UAE Central Bank data, mortgages only grew 1.1% to Dh708.32b at the end of 2013 compared to Dh700b a year earlier despite the huge growth in the industry during the same period. Some mature and stable markets are 85% reliant on mortgage financing.
The new mortgage cap has certainly produced a definite lag in demand as clients adjust to the new financial realities and many of them are planning to participate within the next three years.
And here comes the rub: that demand may never take significantly longer to be reflected in actual transactions as the low mortgage rates of today will probably not be available in two or three years.
The likelihood of interest rate rises in the US as early as Q3 2015 will make financing a UAE mortgage increasingly more costly due primarily to the AED being pegged to the USD. The effect of widening interest rate differentials around the world will still affect affordability as some currencies will strengthen versus their peers, making investing in UAE more expensive when utilizing currencies with low interest rates.
We have been encouraging our clients to buy a more affordable property now and benefit from lower interest rates, and upgrade to their dream abode later. In addition, we have been recommending to developers that they implement easy payment schemes and/or implement rent-to-own schemes for the same reason.
The importance of maintaining affordability for the average buyer is critical. The bedrock of any property industry is its owner-occupiers, and financing tools such as mortgages, easy payment or lease-to-own schemes are critical to allowing them to participate in the industry.
It is they who will have a major influence on the future long-term growth prospects of Dubai’s real estate industry, and it is critically important for the industry to ensure their participation.
See related story: A glimpse of mortgage matters in the UAE
Source: Mohanad Alwadiya, Managing Director, Harbor Real Estate, Special to Freehold