The mortgage cap has been implemented since three months now and looking at the initial impact on the local property market, the impression you get is that it will do more harm than good.
While it is understandable that the UAE Central Bank does not want a repeat of 2008 situation, when banks were caught in a property market-lending frenzy, the situation this time is quite different. Understanding the difference is important to avoid the risk of over-regulation and impacting on the natural growth of the property market.
In 2008, clients could apply for multiple loans with different banks, get loans of up to 95 per cent of the property’s value and get finance for probably any under-construction property. It was combination of all these excesses that caused the problem.
However, in the current cycle, all such excesses are not present anywhere. Even before the mortgage cap was announced, clients could not hide their loans with other banks any more, as the central bank had already set up a central system where all outstanding loans are listed and banks diligently check the client profile before approving any new loan.
Even the most aggressive bank does not lend beyond 85 per cent of a property’s value. Banks restricted mortgages to only completed residential properties, the safest segment in the marketplace. It was close to impossible to find a bank who would give loans for under-construction or commercial property. So banks, who suffered last time, were refraining from excess lending.
While some form of mortgage regulation is good, the aim should be to control the excessive behaviour and ensure fair play for everyone, and not to over-regulate and have a negative impact on the long-term growth of the industry.
With the mortgage cap at 75 per cent of net selling price and other charges related to transfer at 7.5 per cent (inclusive of 4 per cent transfer fee, 2 per cent professional fees, a 1 per cent bank loan processing fee and 0.5 per cent on insurance), the client is expected to pay 32.5 per cent — roughly a third of the property value — from his own equity.
Add to that the possibility of valuation being lower than the agreement price and the client will have to shell out even more equity for the property.
The situation gets tough for buyers who are looking to buy property with value higher than Dh5 million, where the mortgage cap is 65 per cent of the total amount, and after transfer charges the client would be expected to shell out roughly half of the property value from his own equity. Interestingly, the more stringent cap is applied to this segment of the market (high-end ready residential property), where you mostly find end-users and not speculators.
Mortgage cap, as it stands today, will work as a disincentive for end-users to buy a home in Dubai due to the steep requirement of equity. With the population in Dubai set to increase and most of the off-plan properties to be delivered only in one or two years from now, the pressure will be more on rent, which will benefit investors at the cost of end-users.
For all the good intentions, the mortgage cap is going to do more harm to the long-term development of the property market and achieve exactly the opposite of what it is supposed to achieve.
Incidentally, this is the reason why a mortgage cap was not implemented in developed markets like the US and UK, after it was actively discussed by government agencies.
At this point what needs to be done is to make the mortgage cap a bit more flexible. Banks should be allowed to finance the charges and a cap should be placed on the total selling price, rather than net selling price.
The additional cap of 65 per cent for properties on properties above Dh5 million should go. There is no good rationale behind putting additional restriction on this segment of the market.
The cap on subsequent properties to 65 per cent should go and should be raised to 75 per cent. With the central bank monitoring system (that ensures all loans are accounted for) and restriction on debt-burden ratio — i.e., ratio of interest paid on loan to gross income — it will not be possible for buyers to stretch their loans more than what they can service in any case.
So, there is no real need to have another layer of regulation here.
— The writer is the CEO of Acrohouse Properties.
