Newly built marina with palm front villas at the Palm Jumeirah. Experts say the original proposal would have prevented, for example, young couples from buying their first home. Image Credit: Gulf News Archives

The Central Bank’s new limits on mortgage loans discussed last week may save Dubai and the UAE a potential GDP loss of up to 5.71 per cent and 1.43 per cent respectively. A loss which would have resulted from the regulator’s original proposals.

A new study, conducted by international management and investment advisory firm Geopolicity, suggests that the Central Bank’s original proposed mortgage cap would have a wider negative impact on Dubai’s GDP, the UAE’s GDP and investments in Dubai’s real estate sector — not just on banks’ profitability.

If imposed, this cap could have led to a potential GDP loss ranging from 2.78 per cent to 5.71 per cent for Dubai, which could mean a loss for the UAE of 0.69 per cent to 1.43 per cent in 2013 and 2014, according to the report released exclusively to Gulf News by Geopolicity, which specialises in economic and political intelligence and has offices in Dubai.

“In a world where most economies are struggling to grow, even by one per cent, these losses could have a significant impact on the UAE economy,” stated the study titled “UAE: Real estate market report 2013.”


Given that the real estate sector contributes 13 per cent of the UAE’s GDP and assuming that 30 per cent of property investments are dependent on mortgages, the regulation could have compromised the UAE’s overall economic growth prospects in the long-term, the report concluded.

The cap would not only have a “negative impact” on growth across the country but also a “particularly detrimental impact” on Dubai’s economy — unless the limits on mortgage lending are revised upward, it stated.

Last week the Central Bank gave initial approval to a proposal by the UAE’s banking association on setting the limits for residential mortgage loans at 80 per cent of the purchase price for UAE nationals and 75 per cent for expatriates on first homes, according to banking sources. Ratios for subsequent homes would be 65 per cent for UAE nationals and 60 per cent for expatriates.

This comes after the Central Bank’s first announced its plans in December to restrict loan-to-value ratios for mortgage lending to expats and Emiratis at 50 per cent and 70 per cent respectively — a move that sparked a backlash from some banks here.


While the government’s attempts to regulate the market and remove risks of overheating are “necessary and welcome,” there is a need for several policy measures and a “degree of moderation” at a time when property prices and rents are beginning to recover, the report stated.

Asked about the reasons for doing this study, Peter Middlebrook, chief executive of Geopolicity told Gulf News: “Geopolicity is committed to supporting ‘evidence-based-government’ and to calculating the impact of proposed policy on the wider economy, revenues, jobs and services.”

“So far much of the discussion has been about the impact on banks, rather than the structural impact on the economy, and on different income groups looking to invest long term in the UAE. The report, which is an annual report, seeks to contribute towards the ongoing discussion and support UAE authorities in their deliberation.”

The regulator’s earlier proposals would have thrown a large number of mortgage-dependent property investors out of the market at a time when it is just beginning to recover as funding is difficult to get and property prices in Dubai are increasing, the report also found.

This would have a wider impact on the UAE, which depends on attracting an expatriate workforce, because it would lead to a transient workforce rather than people who stay and invest in the country, said Middlebrook.

“It’s not just about banks and their profitability, it has a wider socio-economic impact on the UAE,” he said.

The serious issue is that the original proposal would hurt young couples buying their first home and people setting up families, preventing their entry into the market, experts say.

“That could be important in terms of the UAE’s development. The UAE by its very nature needs to attract expats and it is in the interest of the UAE that these people invest in property and have a stake here. By restricting that, you are inviting them to go to rental market rather than ownership. So they have less of stake in the country. This will not help retain human capital,” said Dr Nasser Saidi, former chief economist at DIFC.

The result? Not only hurting the construction and banking industry, but also a temporary lower GDP growth for the country in the next two to three years, Saidi said.

Foreign nationals

The study works on the basis that 60 per cent of investment in real estate sector is from foreign nationals, mainly South Asians and British, according to Dubai Land Department data. It also assumes that 30 per cent of investments are mortgage dependent, according to data from DIFC and property consultancies.

The report assumes that if the cap is imposed, these mortgage dependent investors would be “priced out” or barred from entering the market due to difficulty in obtaining funds for downpayment.

It then forecasts three different scenarios where there is complete pricing out of mortgage-backed investment, 80 per cent are priced out or 50 per cent are priced out.

In each scenario, it calculates the investment lost as a share of the GDP in Dubai and UAE using 2012 as a base year.

The main limitation of the study is that forecasting is limited by a lack of reliable data in the UAE, the authors said.