Worldly Wise: Strike a balance on mortgages

The UAE Central Bank has recently issued a resolution to cap the amount banks may lend property buyers to finance their purchases. The resolution sets a cap on mortgage lending to expatriates at 50 per cent of property value and has split opinion among experts over what impact it will have on the property market.

It seems the banks were not consulted prior to the issuance of this resolution and, as a result, were taken by surprise. In addition to this lack of consultation with industry players being an unusual step on the part of the Central Bank, it is arguably an unhealthy practice as consultation with the industry not only provides positive feedback on any resolution but ensures smooth compliance with it.

Experts argue that the new policy could curb a rise in property prices. The real estate market has lately started to see signs of recovery and a regulation of this nature would significantly harm the recovery of the market. Others argue that the regulation will have little impact, if any, on speculative investors which the regulation arguably attempts to drive away.

As one developer states, investors don’t use mortgages, clarifying that mortgages are instruments taken by genuine users, and it is this group that the resolution directly affects.

Mortgages are an important form of financing for expatriates looking to purchase property in the UAE, accounting for 66 per cent of total registered transactions in Dubai during the first quarter of 2011.

The cap seems to be aimed at tightening the UAE’s financial system in the wake of the downturn. In April, the Central Bank issued new caps on bank’s exposure to state-backed institutions at 100 per cent of their capital and 25 per cent to any one state-related entity. The move was postponed pending review.

The new cap has, however, had an instant impact on the property market and some brokers have reported that business has slowed by up to 25 per cent.

Some of the UAE’s largest developers have also seen an impact on their share price as a result of the announcement. Shares in Emaar Properties, the largest developer in the country, dropped 1.1 per cent following the announcement and economists are equally concerned that the cap will reduce liquidity in the UAE’s property market.

Recently, UAE bankers requested that the Central Bank delay the introduction of the resolution and have had a meeting with it on the subject of raising the new loan-to-value lending limits.

Following this meeting, the UAE Central Bank issued a notice asking for feedback from all banks and financial institutions regarding the proposed mortgage cap regulations. It is hoped that the feedback from the main industry players will convince the Central Bank to amend the regulation

The lesson learnt from this, is that authorities need to strike a balance between having an un-regulated market and over regulating it to the extent of suffocation. Both are risky, and achieving this balance has always been a difficult but important exercise. Diligent industry consultation and increased transparency will go a long way in achieving a well regulated market.

— Dr Habib Al Mulla is a lawyer and commentator on legislation and economy of the UAE. With 27 years experience, he advises on Federal and local level laws.