The recent circular issued by the UAE Central Bank on capping mortgage lending came as a surprise to many people within and outside the financial world.
At a time when sale prices and rents have been on the increase, this new circular will have a significant impact on the real estate market, and depending on which side of the fence you are, this may be viewed as a good or a worrisome development.
To briefly recap the Central Bank’s new circular, mortgages have been capped at 70 per cent for the first house for nationals and 50 per cent for the first house for non-nationals; while stricter limits of 60 per cent and 40 per cent apply for subsequent houses for nationals and non-nationals, respectively.
While the guidelines came as a surprise, some of the major questions being raised are why did the authorities come out with these new mandates at this time, and why is it being implemented so suddenly, without much grace period?
The sudden nature of the mandate also means that market participants have been left wondering as to who will benefit from these new guidelines and will be the losers? Additionally, what options are there for all players involved in the real estate market, including UAE nationals and expatriates?
As to why, some people have been guessing that the UAE Government is trying to avoid a feral real estate market and heavy speculation as was the case in 2008, which ultimately led to a collapse in the market.
It seems that, at least potentially, the winners of the new circular will be landlords. The rental market is mainly expatriate-driven and this will have an inflationary impact on rents since most people will not be able to afford paying 50 per cent down payment.
This class, mostly salaried, will have to scrap any plans to buy units and instead continue renting, this is in addition to the probable psychological effect it will have, which will lead to further increases.
As to the losers, in addition to individuals who will probably have to pay higher rents, there will be many other affected parties including construction companies, banks and finance companies, and investors who bought properties to resell.
The circular will also have a negative effect on sale prices and may lead to reduction in mortgage lending, which will have a knock-on effect on the profits of lenders.
It is understandable that the UAE Central Bank, as well as companies and individuals in the UAE, would like some measures to avoid what happened in the past.
However, in our opinion, the circular seems to miss the mark as it may not accomplish its ultimate goal.
Increased rental rates could lead to individuals having to borrow from banks (personal loans) in order to be able to meet increased rental rates and demands from owners. This could lead to a shift from mortgages to personal loans – although this would not be a game changer since personal loans may be used to bridge the funding gap only.
Furthermore, certain institutions which specialise in mortgages will be affected by the new rules as they may see their business negatively impacted and, unlike banks, do not have any other banking product to offer.
The Central Bank should be applauded for taking pre-emptive measures to avoid any problems and inflationary pressures in the real estate market. However, this may be better accomplished through other means such as limits on mortgage amounts that are tied to an individual’s salary, credit worthiness of the borrower and improved due diligence.
As things stand right now, it seems that the circular will only bring down the prices while increasing rentals in the UAE, not to mention the negative effects it may have on mortgage companies and other financial institutions.
It remains to be seen if the new rules will be kept intact by the Central Bank or whether it will be revisited pursuant to the feedback received from various components of the UAE’s real estate market, most notably the lenders.
About the authors: Ahmad Waheed is an Associate in the Banking & Finance Department, and Victor Siriani is Marketing Manager at Bin Shabib & Associates LLP, a regional law firm.