As property prices in Dubai continue their rise, the Central Bank of the UAE (CBUAE) has issued new mortgage regulations designed to limit speculation and help ensure the long-term stability of the investment environment. However, it appears some rules may affect only a small portion of potential buyers.
While the real estate market was hard hit by the global financial crisis of 2008 and 2009 – with some areas seeing property values drop as much as 65% – the sector has begun to recover over the past two years, with sale prices for apartments and villas rising by double digits in 2012. The first nine months of 2013 has brought similar growth, with prices up 18% year-on-year, according to a report by Jones Lang LaSalle.
Indeed, some industry watchers are worried that a bubble might be forming. However, according to a recent report by Goldman Sachs, these concerns are unfounded, pointing to the fact that real estate prices are still well off their peak in 2008. The investment bank also cited the new CBUAE regulations as a factor that could keep price increases in check.
Speaking to reporters in late October at the World Islamic Economic Forum in London, Sultan Nasser Al Suweidi, governor of the CBUAE, said, "We are watching house prices, we are not worried. Banks are very cautious, they are not the same as in the boom years of 2005 to 2008."
The central bank’s new regulations set out restrictions that depend on the buyer’s citizenship, whether the purchase is by a first-time home owner and the price of the property, among other factors.
For first homes priced at less than Dh5m ($1.36m), loan-to-value (LTV) will be capped at 80% for UAE nationals and 75% for expatriates. These percentages fall to 70% and 65% for higher-priced properties. LTVs for second homes will be limited to 65% for UAE citizens and 60% for expatriates. Loans for off-plan units will be capped at 50% LTV, irrespective of the property price or nationality of loan applicant.
Measuring the impact
While the rules may pinch a bit for investment properties, particularly for off-plan units, the regulations are in fact a milder version of what was first proposed by the CBUAE late last year. At that time, the central bank called for limits of 70% and 50% for first-time citizen and foreign buyers, respectively, falling to 60% and 40% for second homes. However, these rules were subsequently amended, following a period of consultation with commercial banks, which said their business would suffer.
Moreover, beyond the question of specific figures, the effect of the regulations may well be limited due to the fact that the vast majority – industry players say 80% – of property buyers in Dubai pay in cash. In addition, the rules do not prohibit investors from sourcing financing from banks outside of the UAE.
While the central bank may have only limited control over the real estate market, Dubai’s authorities have taken other steps to limit speculative activity, including a recent increase in property registration fees, which were raised from 2% to 4%, a move that should discourage short-term investors.
Then in November, the local media reported that Emaar Properties, the largest developer in Dubai and government-owned, would restrict real estate agents from selling off-plan units purchased under their own names until handover. In addition, agents are barred from buying ready units until they have been on the market for a minimum of 14 days, although the developer does not restrict resale. Earlier this year, the chairman of Emaar, Mohamed Alabbar, said the company was working to limit the flipping of its properties.
The restrictions from Emaar suggest, if nothing else, that the real estate market is indeed heating up. While the CBUAE’s mortgage rules may affect only a limited portion of buyers, when combined with higher registration fees, they could help to ensure that growth continues at a reasonable pace and that the sector remains fundamentally sound and free from the instability seen at the end of the most recent bubble.
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