Falling prices don’t mean property market maturity

Property transactions have fallen sharply in Dubai as banks make it more difficult for buyers to get a mortgage. This in turn is pushing people towards off-plan schemes which could potentially lead to problems, writes Sean Cronin.

The Boulevard buildings by Emaar Properties in Downtown Dubai. The mortgage cap brought stability to the Dubai property market when it was needed. Sarah Dea / The National

It feels a bit like the Monty Python parrot sketch.

The property pundits keep telling us the Dubai market is just sleeping.

Are prices falling? No sir, just stabilising.

Should we worry? No sir, it’s the sign of a mature market sir – lovely plumage, the Norwegian Blue.

The notion that a property market is maturing because prices aren’t falling quite so fast as they fell the last time they were falling slightly less fast is nonsensical.

It is Michael Palin telling John Cleese that the expired bird is merely having a nap.

Some international property consultants, who really should know better, have been at pains to sugar coat the huge decline in transactions this year.

It makes me imagine pushing them from a very tall building and watching them “stabilise” all the way down until they reach maturity on the pavement.

That prices are falling is really not a problem. But the fact that people can’t buy built homes and instead are being pushed towards off-plan development is potentially a problem.

As banks make it more difficult for buyers to get a mortgage, developers are filling the gap, creating two very distinct property markets of the built and the unbuilt.

Developers are offering ever-more attractive terms to entice investors to put their money into off-plan properties rather than completed ones.

This has rapidly created a distorted market, not a mature one. It has also established the paradox of frenetic home building at a time of falling prices and transaction volumes that have tumbled by two thirds from a year ago.

It is why we simultaneously read about glitzy new apartment launches and brokerages going bust on the same page.

The caution of bankers is understandable given the scale of the bad debts left in the wake of the 2008 crisis. But equally, since the introduction of the credit bureau, banks should have more tools at their disposal to identify good and bad lending risks.

The problem here is the solution-that-becomes-a-problem, problem.

When the flippers popped up again in Dubai two years ago, queuing like greedy meerkats outside the offices of developers, a swift policy response was required to avoid a repeat of the first quarter of 2008 when the last bubble began to overinflate.

The response came in the form of a mortgage cap introduced in late 2013. It restricted the loan-to-value ratio for mortgages at 75 per cent for expatriates and 80 per cent for Emiratis for properties below Dh5 million.

It was brilliantly effective at slowing the market down and may well have prevented the repeat of another 2008-style property market collapse. But 20 months on, keeping it makes market volatility more, not less, likely. It may even be pushing more speculative money into off-plan development

The proof is in the pudding.

A quick look at the propertyfinder website reveals hundreds of listings for as-yet uncompleted homes launched in the past two years, many of which are being sold on at zero premium. Speculation is still thriving.

Banks are not so much reducing their property lending risk as moving it from Peter to Paul – or rather from the would-be house buyer to the off-plan developer.

The existing mortgage cap does not discriminate between speculator and end user. It makes it harder for people to own property by effectively excluding them from buying houses that are built and instead encourages them to invest in off-plan properties that may or may not be built and to commit to repayment plans that they may or may not be able to sustain.

This works well for developers. But it does not work well for the city.

If the aim really is to curb speculation and the volatility that ensues, then a flipping tax along the lines of the one recently announced in New Zealand may be a more effective way to do it.

The mortgage cap brought stability to the Dubai property market when it was needed.

But the strong US dollar and weak oil price are together doing a perfectly good job in “stabilising” the market right now.

Meanwhile, the first-time buyer is being hit over the head with a skillet.

The parrot isn’t dead. Just stop hitting it.

Follow The National's Business section on Twitter