Just when the UAE property market was recovering and 2013 was widely expected to herald further widespread recovery came the news of the capping of mortgages. The reason for the step was to avoid the excesses that led to the earlier crisis and promote long-term stability.
However, a closer look gives a feeling that these fears are misplaced at the moment and this proposal, for all its good intention, could do harm.
What does not look right is the extent of cap proposed by the central bank. To put things in perspective, the US and the UK, which are in a similar situation in their property cycles, do not have such a cap. An idea for capping the mortgage ratio was floated by the UK chancellor, but was widely criticised as a blunt tool that would cause considerable unintended harm to consumers and hence not implemented.
While the cap was introduced in Hong Kong and Singapore over the past year, it was done since those property markets were quite heated. Prices almost doubled in five years and there is a severe shortage of land availability, which has restricted new construction.
On the other hand, the property market in Dubai is neither heated (prices are still 40-60 per cent below their peak) nor does the market suffer from shortage of land availability.
The proposal is expected to avoid the risk of large losses at banks in the future. But a closer look at their profitability shows the majority of losses were suffered from off-plan projects, where many got delayed or did not take off, and in commercial projects, where price dropped more severely (up to 70 per cent) than in the residential sector.
Mortgage lending to completed residential properties has been a healthy business for the banking sector overall. So a restricted LTV on commercial projects and off-plan projects can be justified, but does not hold for completed residential projects.
Another argument is that the new ratio will discourage banks from giving too much loans and fuel another false boom with bank money. But this does not hold either.
Total property loans given by all banks currently stand at Dh163 billion until the third quarter of last year. And this has been roughly the same in the past two years. As the markets were recovering, mortgage balances moved from one bank to another, but did not increase their aggregate volumes.
One benefit expected from this proposal was that it will discourage clients from taking multiple loans beyond their sensible limits. During the previous boom, banks landed up giving multiple mortgages to a client, as they had no information about client’s mortgage history with other banks.
However, this problem has already been addressed by the central bank when they started putting information of all outstanding loans of clients. All banks have access to that information and are using it diligently before disbursing new mortgages.
Other benefits sought from the capping proposal was to discourage speculation. But that does not look too convincing either. the bubble of 2008 was led by off-plan projects, where prices were often at premium of 20-30 per cent over similar completed projects.
Speculation in off-plan projects was driven mainly by cash clients. Besides, approximately 70 per cent of transactions in Dubai’s freehold area are in cash (based on figures of 2012), which will not be affected by this rule.
What this proposal will do is discourage genuine home owners just at a time when most of the countries, in a similar situation, would do anything to attract them. There is also a risk that the proposal will put more pressure on the rental market as most buyers will now find it unaffordable to take a mortgage.
A more balanced proposal, that will avoid the risk of excesses but still retain the long-term attractiveness, would be to keep a tight restriction on commercial loans and on off-plan projects. And put a more flexible LTV cap for completed residential projects at 75 per cent.
In future, when prices rise further and the central bank would like to give a signal to the market, it can reduce it to 70 per cent. Beyond that, it should let the market decide its own course.
— The writer is the CEO of Acrohouse Properties.