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Mortgage cap a matter of perspective

A 50 per cent cap could also hurt the timing of someone’s entry into the property market

Gulf News

Dubai: On the face of it, a mortgage cap in the UAE is in the natural scheme of things. At some point over the last two years, ceilings have been set on personal loan exposures that a UAE resident can hope to tap, and nor is there any longer 100 per cent financing to buy a car. From that point to placing a 50 per cent cap on mortgage disbursals for expatriates might seem a small step. But is it?

For a property market that is still inching its way into some sort of stability and sustained demand generation, any cap on mortgage exposures will shake it to its very foundation. It would immediately cut off a sizeable section of the resident base — who would have been harbouring thoughts of acquiring a permanent base in the country, either short-term or longer — from taking the plunge.

It is a question of perspective. Would a professional three to five years into his or her career have the means to mobilise Dh500,000 as equity for a Dh1 million property? Mind you, any lender would tell you that young professional with a family would be the ideal candidate to get into the mortgage space. Such a person plays for keeps, a banker would say.

There are whole swathes of new projects being taken up in Dubai with this buyer profile in mind. Now such a prospect would find it difficult to get anywhere remotely near a home that he can call his own.

A 50 per cent cap could also hurt the timing of someone’s entry into the property market. By the time he is able to mobilise his share, the property could see a value appreciation and thus require further fund infusion as equity. Then it becomes a question of whether the individual will ever be able to catch up or not.

It will take time for the property market — and buyer-prospects — to come to grips with a 50 per cent cap. While it is some years since the market has seen 90 per cent loan-to-values, it was getting comfortable with the 70-75 per cent LTVs that are available now. From there to 50 per cent represents a steep drop and would require a lot of getting used to.

What will it mean for the next wave of projects that are to be launched? A mortgage cap could mean they could be priced out of the reach of a sizeable buyer base. It would then set off a vicious cycle of weak demand undermining a project from reaching its full potential. That is a risk no developer would want to take on. More so, when the property market is still rebuilding its foundations.