Guest comment: Chris Dommett on mortgages

Chris Dommett

, the chief executive of the mortgage advisory

John Charcol

in Dubai, writes a guest blog entry for this week about the calming of the property market and gradual renewal of lending for home buyers.

He writes that banks are lending again, but with "conservative loan to value ratios and an emphasis on the borrower's ability to repay the mortgage from his or her salary or business income".

While many investors have gotten burned by the whipsaw turn-around of the market, "their best hope to recover their investment while enjoying a good quality of life is for the market to stabilize and then grow in a well regulated and sustainable fashion".

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There has been much debate in recent weeks on whether the property market and the economy of Dubai have bottomed out or even started a recovery. This debate was fuelled by a report by HSBC indicating that banks have started to relax their lending terms, and buyers and sellers of property are reaching closer agreement on what represents a correct price. The number of property listings has decreased, suggesting that many potential sellers have decided to retain their property until the market improves, and most of the distressed sale bargains have been taken up by those with cash or lucky enough to qualify for a mortgage. Transaction volumes remain very low though, and I believe it is still too early to say with any confidence that the worst is over. We have the traditionally quiet months of summer and Ramadan to come, and the general consensus is that we will only really see some movement in the market in the last quarter of this year or the first quarter of 2010.

Provided that the fundamentals of the Dubai and UAE economies remain strong, and the recent rise in the oil price is a positive sign, we should come through this crisis intact. It should even make us stronger and more competitive on the global scene as we learn from the lessons of the worst global economic meltdown since the Great Depression. My optimism in this is based on signs that in many areas of the economy we are getting back to basics, and away from the unsustainable behaviour that was so prevalent during the boom times.

The legal framework relating to real estate is gradually coming into place, and this is a fundamental requirement for sustainable future growth and investor confidence. Developers are also being forced to adopt the business models of more mature markets, whereby they do not rely solely on off-plan sales and continuous stage payments from buyers to fund the construction. Off-plan sales have completely dried up, and the emphasis is moving to good quality, well located, finished properties being purchased by people who intend to live in them. These buyers will typically require a mortgage to buy the property, and banks prefer this type of applicant to those looking purely to invest. Owner occupiers with a single property fare much better when seeking a mortgage than the investor with multiple properties in various stages of construction.

Banks are also getting back to basics in their lending, with conservative loan to value ratios and an emphasis on the borrower's ability to repay the mortgage from his or her salary or business income. Gone is the assumption that the value of the property will continue to rise, and security of the mortgage is now regarded as a distant secondary source of repayment after the borrower's regular income. A quieter and more stable property market will mean borrowers will keep their mortgage for longer, and while this might deprive the banks of fee income in the short term, it compensates for this by offering longer term, sustainable interest revenue and a more established relationship with their customer.

The mortgage products themselves have so far been basic vanilla offerings, whether in conventional or Islamic form, and this is likely to continue until banks have regained their confidence. A more stable market and a sounder legal infrastructure should give them the opportunity when the dust clears to innovate on their products, meaning greater choice for the consumer, and a closer match between the products and the real needs of the borrowers. In the meantime however, what the market needs is the greater availability of basic mortgages to allow people living and working in Dubai to own their own home at an affordable rate. This gives them a longer term stake in the future of the city, with their property regarded primarily as a home rather than as a means to get rich quick.

For many in Dubai, the correction in the property market and the subsequent return to basics has been very costly. They purchased at or close to the peak, and are now saddled with negative equity and a mortgage they can scarcely afford. However, having decided to stick around and weather the storm, their best hope to recover their investment while enjoying a good quality of life is for the market to stabilize and then grow in a well regulated and sustainable fashion. The best way for this to happen is for everyone involved to get back to basics and to remember these basic values for the future.