Regulations must end property ‘boom and bust’

Boom and bust economic cycles are a threat to the sustainable development of a country. The volatility makes it difficult for companies and consumers to budget and they become reluctant to spend and invest, which hinders growth. This is why the UAE Central Bank and the other relevant monetary and fiscal authorities are wary of asset bubbles, when prices increase sharply on the back of speculative demand and then collapse, often leaving people without savings or investments for later life.

To help prevent this, the Central Bank has increased the deposit required to purchase property with mortgage finance. From next month, purchasers will be required to deposit a minimum of between 20 and 25 per cent of the value of the property to secure finance. The Bank has also capped the amount that can be borrowed at between seven and eight times the borrower’s annual income.

Banks are expecting to see some decline in mortgage lending as a result of the new regulations, which will help to reduce speculation and unjustified prices in the property market, one of the pillars of the UAE economy. While the worst of the excesses of previous years — like the speculative buying and selling of off-plan properties — has been curbed, housing prices have been increasing a bit too fast for comfort. The fundamentals of the property market may be sound at present, but the Central Bank is correct to take preventative action now; it must be ahead of the cycle to effectively influence the economy. The new regulations will also help prevent commercial banks from making large loans to customers who cannot afford to service them. Bad debt was the root cause of the international financial and economic crises, the effects of which are still being felt across the world. The property market must first serve those who want to purchase homes that they can afford and intend to live in for the foreseeable future. The new regulations will help ensure that the market has the stability necessary for it to grow and make a sustainable contribution to the economy.