The mortgage market in the UAE is not very attractive for end users, especially those looking to secure home loans for the first time. The home financiers should rethink their product offerings if they want long-term investors to enter the market and the mortgage business to grow in a meaningful way, says Matthew Green, CBRE’s Head of Research and Consultancy in the UAE.
The headline interest rate of 3.99 per cent, advertised by some lenders in the UAE, is relatively all right compared to some very cheap mortgage options available elsewhere in international markets. However, these headline rates are available only to the select few who can afford to put a large chunk of the home value down as upfront payment, Green says. “I think in most cases the banks are not actually providing the interest rates they say they are providing.”
Unlike the matured markets such as the UK and the US, fixed-rate mortgages are not generally available in the UAE. Homebuyers here are offered financing on variable rates, which means if a homebuyer signs a financing deal at 4.5 per cent variable rate for 25 years, the bank can increase the interest rate to 7.5 per cent and there is no regulation that bars them from doing so. Similarly, the banks are not bound to pass the benefit of a lower market interest rate to their clients.
“Ideally we would like to see some regulations for the mortgage market and the banks, particularly in terms of the products they offer so it could be more attractive for end users,” says Green.
This, he adds, will give a chance to long-term investors, the people who have come to Dubai to live and to work, to get into the market, which unfortunately, is not being encouraged at the moment.
Property prices in the UAE, Dubai in particular, fell more than 50 per cent from the peak in 2008 when the global financial crisis jolted the UAE economy. Numerous projects were indefinitely delayed as developers and contractors struggled to secure financing to finish ongoing developments. The homeowners suffered equally and most found it hard to pay the expensive mortgages with interests rates of up to 8-9 per cent secured during the boom period. More recently, the property market has started showing signs of revival and the investor vigour to re-enter the market is evident from the consistently rising property prices for the past 18 months and instant sale of some of the new property launches this year. Forbes says that the Dubai property market is the second-hottest market in terms of recovery, surpassed only by Hong Kong.
Forbes has based its findings on the growth in average house price in 2012, which stood at 19 per cent for Dubai, according to reports. However, end users are not the main drivers behind the spike in property prices, Green says.
There has been an influx of capital from some of the economically troubled Western European countries and some of the Arab nations into Dubai. This liquidity is targeting safe markets, which offer opportunities for capital appreciation, and Dubai is a perfect destination for such liquidity, says Green.
His argument is supported by HSBC’s recent report, which indicates that 79 per cent of the villa and apartment sale transactions that took place in 2012 were executed on cash basis. This figure is up from 61 per cent in 2011. Mortgage finance accounted for only 16 per cent of the transactions, the report indicates.
A senior banker with a Sharia-compliant financial institution, who does not want to be named, pinned the cash component of the market slightly lower than the HSBC report, at 70-75 per cent, but said that the trend is continuing and the market has seen cash buying even in the first quarter of 2013.
The UAE nationals accounted for 21 per cent of the total cash transactions, while 57 per cent was divided among GCC nationals, other Arabs, Indians, Pakistanis, Russians, Britons and Iranians. The rest of the 22 per cent is classified as “others” in the HSBC report, which Green and the banker believe are more likely to be European investors.
The inflow of foreign capital into the property market adds a touch of uncertainty and fears, which could heat up too fast and could deflate as easily if the foreign liquidity leaves. One way to counter this and ensure market stability is to facilitate the entry of long-term investors, Green points out.
Despite the fact that cash is king in Dubai’s property market at the moment, the origination business — new mortgages — has seen some growth, says the banker.
The mortgage market grew by 33 per cent in 2012 over 2011 and has been growing at the same rate in the first quarter of 2013, he adds. The total value of the mortgage market in 2012 was in the range of Dh8-Dh9 billion and if it continues to grow the way it is growing, it would reach between Dh12-Dh13-billion mark in 2013.
Green, however, believes that home prices are already beyond the reach of first-time entrants as they have missed the opportunity to enter the market some 18 months ago. It has become even more difficult now for them as under the proposed Central Bank loan-to-value ratio caps, they will have to come up with very large down payments, he notes.
“The people who are already rich are able to exploit the current market situation, but, unfortunately for the everyday man, it is not an attractive market at the moment,” Green adds.