Property Mortgage Caps Encourage ‘Responsible Lending’

With the much-awaited Central Bank mortgage caps coming into effect a month from now, fears of an unsteady property market have been abated to an extent.

According to the new ruling, mortgages will be limited to 75 per cent of a property’s value for an initial investment of less than Dhs5 million for first time expat buyers with loans restricted to 80 per cent for Emiratis.

Following an IMF warning of Dubai’s property market overheating and paving the way for another boom-bust cycle, the government has been proactively introducing regulatory measures.

But a mortgage cap could be the most crucial among all regulatory measures simply because it regulates finance in the market and provides a solid leverage.

“Restriction of the mortgage lending does two things – it encourages responsible lending and responsible borrowing,” said Sean Yates, principal associate at Eversheds, Dubai.

“Previously there was a reliance on self-regulation by both the banks and investors and from the results of the bubble and the subsequent crash, it is quite evident that self regulation needed a bit of help.”

Dubai’s Land Department head Sultan Bin Mejren reiterates Yates’s argument on uncontrolled lending but emphasised that the latest regulation will make the market more transparent.

“It will also enhance confidence in the real estate sector, and will attract new local and foreign financial institutions, therefore increasing their numbers in the market which will create positive competition and give investors more options that will benefit them,” said Bin Mejren in a media statement.

Yates said that the move to limit home loans will be imperative in creating a market where investors are more tied to the property they purchase because they have contributed around 25 per cent of their own money to it.

But the question remains whether the mortgage cap will help cool down Dubai’s property market and stem speculation.

“While speculators, who the regulator is trying to reduce do not leverage, it needs to find an end-user/long term investor, during the construction phase, to offload the asset,” said Gaurav Shivpuri, head of capital markets at MENA, Jones Lang LaSalle.

“The reduction of the loan-to-value (LTV) on off-plan purchase of property is likely to reduce the ability of the end user/long term investor to buy assets during the construction phase, thus reducing the attractiveness of buying off-plan for speculators. This should help in cooling off-plan sales.”

Shivpuri said that mortgage caps would be effective in solidifying the buyer base in Dubai’s property market since end users do not venture into the market unless their financing is secure.

“The cap on off-plan LTV is going to limit the amount of off-plan sales that occur to end user. This creates a danger that it may drive up values for completed assets, which is precisely what should not occur,” said Shivpuri.

As the mortgage cap will limit the funding for investors, who can be potential end-users, the fact remains that Dubai’s property market is majorly cash driven.

“In this market cycle, the majority of residential transactions are completed in cash rather than through traditional finance avenues, meaning only a small fraction of the buyer demographic will actually be impacted by the new rules,” said Mat Green, head of research & consultancy UAE, CBRE Middle East.

“Further regulation of the off-plan market is still required to help reduce price volatility and reduce the negative impacts of speculation.”

As Dubai’s property sector readies for a growth wave, measures like the mortgage caps and a doubled property transaction fee will help in insulating the market further.

As Emaar chairman Mohammed Al Alabbar told Gulf Business at Cityscape Global 2013, drawing on the past experiences to correct the future is important.

“Banks are tight on lending, the central bank is tight on lending, government regulations are being modified and monitored,” he said.

“So I think we are fine but people like to trade, people are greedy and so mistakes do happen. But as long as we minimise our mistakes, and we learn from our past mistakes, we go a little safer.”