There have been a number of changes in the mortgage market over the past year. New mortgage caps and higher transaction fees have reflected the government’s efforts to contain market price fluctuations.
Meanwhile, the threat of higher interest rates and the introduction of the new credit bureau could negatively affect efforts by UAE banks to lure more retail customers.
The changes have already had an effect on Dubai’s real estate market. The market for luxury homes is softening as the mortgage caps and higher transfer fees – both introduced towards the end of last year – take effect.
According to new data, real estate brokers say that overall price growth in the emirate’s property sector, which last year was among the fastest in the world, is slowing.
Average values across the emirate rose by 3 per cent in the second quarter while villa prices were nearly flat, according to Colliers International’s house price index.
Average prices across all home segments rose by more than 20 per cent last year.
The Colliers index – considered one of the most reliable in Dubai because it measures actual achieved prices for homes mortgaged through HSBC, Emirates NBD, Standard Chartered, Amlak Finance and Noor Bank – found that villa prices fell fractionally to Dh15,866 per square metre in the second quarter from an average of Dh15,931 per sq metre in the first quarter.
For investors still considering buying into Dubai’s property sector, here are five of the most significant changes in the mortgage market over the last year:
Mortgage caps
Securing a mortgage became a little harder for UAE residents following the Central Bank's introduction last October of tighter mortgage limits.
Expatriates buying a property for under Dh5 million must now produce a minimum deposit of 25 per cent, rising to 35 per cent for properties above Dh5m. For second properties, the minimum deposit is 40 per cent.
Emiratis have it slightly easier. But they still need a 20 per cent deposit for homes under Dh5 million, rising to 30 per cent for homes over Dh5m, and 30 per cent for any subsequent properties.
Even off-plan properties have become harder to acquire, requiring a 50 per cent deposit regardless of whether the buyer is an expat or a national.
Few could argue against the measures after a 53 per cent rise in property transactions last year in Dubai to total Dh236 billion, according to Dubai Land Department figures – bringing with it an average growth in real estate prices of 22 per cent, according to Jones Lang LaSalle.
However, others may argue the caps have calmed the market too much. According to data from Phidar and the real estate information company Reidin, Dubai’s villa market, the first segment of the housing market to recover after the global financial crisis, went through a steady decline in the volume of sales from more than 200 a month last November to fewer than 100 a month by the end of July this year.
"The federal mortgage caps have had a notable impact on the volume of villa deals, with the upper end of the villa market being most affected," said Faisal Durrani, an international research and business development manager at Cluttons.
“The mortgage caps have driven up the size of deposits needed to secure homes, and for those households looking to step on to the property ladder, the dream of acquiring a large villa now means that they are likely to have to save for longer before they can transition from rented accommodation. We are certainly seeing that reflected in the figures coming through,” he added.
Transaction fees
Along with mortgage caps, the Dubai Land Department announced last year it was increasing transaction fees in a bid to protect Dubai’s rebounding property market from speculators.
The move doubled the transfer fee on each sale to 4 per cent of a property’s value from October 6 last year.
“It won’t affect the health of the market,” said Sultan bin Mejren, the director general of the Dubai Land Department, at the time of the announcement.
“On the contrary, it will only stop people from making a quick sale to make a small profit. This is harmful for the market.”
Speculators “flipping”, or selling a property soon after buying it – even before it is built or handed over – added much heat to Dubai’s market before the financial downturn by inflating real estate values, forming a bubble.
The transfer fee announcement came a week after the Dubai Land Department reported Dh1.2 billion worth of property sales in a single day – its highest in 50 years.
Mr bin Mejren said other countries had similar transfer fees. In France it was 6 per cent, in India 7.3 per cent, while in the United Kingdom it could vary between 4 and 15 per cent, he said.
Interest rates
It has been more than five years since the major central banks around the world slashed interest rates to record lows, and at times it has seemed like the rates would stay low forever.
But the days of low interest rates are now drawing to a close, Jahangir Aka, the managing director for the wealth managers SEI Investments Middle East, predicted earlier this year. “I expect rates to finally start creeping up from early next year. Slowly at first, then sharply as economic growth returns with a vengeance.”
Unlike years gone by, there is now a whole range of UAE mortgages available at reducing rates of under 4 per cent. But it pays to plan ahead for higher borrowing costs, especially since rates are likely to start rising in the UAE before they increase in the West, warned Warren Philliskirk, an associate director at Mortgage International Business Dubai.
“The UAE is seeing a strong rebound in every sector of its economy, and I believe it won’t be too much longer before rates are driven up,” he highlighted at the beginning of this year. “Rates could rise much faster than in the US, despite the dollar peg. It wasn’t that long ago that local banks were charging mortgage rates of 8.5 per cent, double US rates.”
One couple determined to protect themselves against the chance of an early interest rate hike is Zaigham Burney and his wife Amun.
The married couple – natives of Pakistan with roots in Canada and the United States – bought an apartment in Dubai Motor City in August last year and decided to pay a little extra for the protection of a fixed rate, says Mr Burney, 26, a financial analyst.
After comparing mortgages across the market on the price comparison site Souqalmal.com, they opted for a two-year fix. “Our plan was to see where the housing market would go over the next couple of years, then make a decision either to sell and move up the ladder or buy a second property,” said Mr Burney.
But Mrs Burney, 26, an investment lawyer, said the couple have not overstretched themselves. “We can safely cover our monthly mortgage payments from our salaries, even if they rise after our two-year fix comes to an end.”
Al Etihad Credit Bureau
Another factor that could affect property buyers accessing a mortgage is the UAE's new credit bureau.
This month, the Al Etihad Credit Bureau started issuing consumer credit reports to banks and financial institutions that have subscribed to access its credit reporting system.
The fledgling credit bureau, which should ultimately help banks to better regulate their lending risks and reward those who do not default on debts with better interest rates, said the credit reports would include the debt obligations of customers and their payment behaviour patterns for the past two years.
This means that those applying for a mortgage will have their financial records vetted more effectively by participating banks. And those who have overstretched themselves with multiple loans and credit cards could struggle to access a home loan. The cost of financing in the UAE is hovering at lows of at least eight years. This has spurred a boom in borrowing and authorities are keen to prevent credit growth from spiralling out of control.
The bureau intends to create a database of the credit history of all retail borrowers to enable banks to build an accurate picture of a potential borrower’s indebtedness, allowing them to assess his or her ability to honour the debt. At the moment banks cannot check the credit history of customers relating to other lenders.
New products
While mortgage caps and higher transaction fees made borrowing more expensive for some, the banks marketed new products and technological advancements to ease access to mortgage lending.
Thanks to improvements in technology, customers can undertake increasing complex banking transactions online, with even mortgages and loan approval now secured on the internet.
And the fight for retail customers has intensified as the country’s economy recovers from years of stagnation. That comes amid record low interest rates and increased demand for loans to fund everything from refrigerators to cars and homes.
One way banks are trying to lure customers in is through home equity mortgages, which provide customers with large equity or little debt against their property the opportunity to release some of the collateral in return for a monthly repayment. While these products are not a new development in the personal finance market, their growth in popularity is.
“They have always been there in the region,” says Warren Philliskirk, the director of Mortgage International in Dubai. “But they have become more popular in the past year.”
In July, Mortgage International noted a 50 per cent rise in the past 12 months of the number of people taking out home equity release mortgages – not to be confused with lifetime equity release mortgages available in other countries, in which debts are settled at the time of the owner’s death or the sale of the property.
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