Confidence is back in the UAE economy. With it, risk-taking on the property market is gradually coming back too – on the part of both banks and consumers.
As the Dubai authorities move to curb a second speculative bubble by doubling property transfer fees, many end-user investors are still confident that the property rebound is gaining traction.
Despite having seen the effects of the property crash that followed the last boom, buyers are hoping that recent rises in real estate values could signal a resumption of the 2006-07 property bull market, said Jean-Luc Desbois, the managing director of Home Matters, a mortgage consultancy.
Many recent mortgage buyers have been “people that missed the boom and felt they missed an opportunity,” Mr Desbois said. “People have thought ‘I don’t want to miss this opportunity’, and there’s a lot of people like that.”
The strength in the property market has encouraged banks to ease their underwriting criteria, said Suvo Sarkar, the general manager of retail banking at Emirates NBD.
“Over the last 18-24 months, Emirates NBD is far more confident of property prices and we’re allowing a large loan-to-value for our customers,” he said.
The bank is also reviewing whether to extend mortgage credit to overseas buyers.
So far, so good. Prices of apartments in Dubai are up 38 per cent in the past 12 months and villas have risen 24 per cent during the same period, according to research from Standard Chartered.
But a build-up of consumer debts is worrying some observers and has also triggered an unprecedented move by the Dubai real estate regulator to double the transfer fee on each sale to 4 per cent from October 6.
Consumer financing grew by Dh3.8 billion in June, a record for a single month. In the first six months of this year there has been more new retail lending generated than the previous 24 months combined. Figures for July showed a further Dh2.2 billion in personal lending to a total of Dh278.4bn.
Part of that is thanks to historic lows in Emirates Interbank Offered Rates, also known as Eibor.
As a result of a surge of liquidity into banks’ balance sheets, it is cheaper to borrow than it has ever been. The one-year Eibor rate is currently 1.26143 per cent – that compares to more than 4.5 per cent five years ago at the peak of the market.
However, the only way is up. Interest rates are expected to rise from historic lows as the Federal Reserve in the United States winds down its crisis-era stimulus policy known as quantitative easing. The first increase in rates is widely expected to come next year.
Household finances could become strained as a result of rising rates, although savers would also potentially benefit, said Francisco Gomes, a professor of finance at London Business School.
“[From] the perspective of the UAE economy the risk is whether it leads to a spike in household default rates, which is the concern that the latest numbers on household debt potentially raise.
“To the extent that higher US interest rates can spill over to the UAE, then savers will be better off and borrowers will be worse off,” he said. “In particular those that have borrowed heavily might have a hard time repaying their loans.”