It is extraordinary how the Dubai real estate boom has spiralled ever upwards over the past few months despite high home loan rates. Price increases have been among the highest since the launch of freehold ownership in 2002.
The UAE Central Bank has followed the US Federal Reserve in cutting its base rate to two per cent, and this makes borrowing astonishingly cheap for the local banks. It also makes lending to local home buyers at 7.5-8 per cent incredibly profitable, and will doubtless leave the lenders with record profits for 2008.
In effect the UAE is acting as though the banking sector needed rescuing when in fact it has never been healthier with robust balance sheets almost unaffected by the sub-prime mortgage crisis and very high capital ratios thanks to mushrooming oil revenues. That banks can then lend to home buyers at a huge profit margin is an additional bonus profit.
The banks argue that the demand for mortgages in the UAE is presently so high that they do not need to cut their rates. People will borrow at pretty much any rate, and there are in fact only a limited number of properties that require financing as the supply of real estate is restricted by construction delays and falls well short of demand.
It is true that market forces are operating in exactly this fashion in the local mortgage market. All we have seen by the way of innovation is the Commercial Bank of Dubai offer the most competitive mortgage product as a means of securing the top tier of borrowers.
Now we have Amlak Finance's Easy Start mortgage, which offers lower payments over the first four years of a home loan with increased payments from year five. On a Dh1 million loan this cuts payments from Dh9,500 on the normal finance rate of 7.75 per cent to Dh6,458, a monthly saving of Dhs3,042.
Effectively this means the borrower is paying a fixed rate of 5.3 per cent for the first four years. It is good to see the price of home loans coming down for the typical borrower in the UAE, for Amlak's loan criteria are pitched at the standard market and not the top draw like the Commercial Bank of Dubai.
However, a four-year discounted mortgage is a useful innovation but it still leaves the floating rate for UAE home loans at 7.75 per cent significantly above the current US 30-year fixed rate benchmark rate of 6.12 per cent.
For home loan rates in the UAE to be equivalent to home loans in the US – and with the dollar peg in place, there is no reason why borrowing should be more expensive in the Emirates – then there is still a gap of 1.63 per cent to close.
But home loan borrowers in the UAE should take heart as this gap is closing, and the recent mortgage innovations from the Commercial Bank of Dubai and Amlak are steps in the right direction. This is also good news for house prices.
If mortgage rates were already on the floor then it would be possible to argue that finance costs were as low as possible and therefore upward house price movement potential was limited.
But this is not the case, so as home finance falls in cost house prices should advance further.
For a real danger signal in any property market is when the cost of finance bottoms out. Then there is nowhere to go except upwards, and as interest rates rise there is a downward pressure on house prices.
It is fair to note that at the moment in the UAE the percentage of mortgaged properties is very low by global standards, and that therefore the impact of mortgage rates on house prices is probably also less than elsewhere. But this will of course change as current development projects are delivered to end users and their new landlords.
What seems to be happening is that the local home finance market is responding to the surge in new customers by first taking big profit margins but then gradually reacting to increased competition by coming forward with new products, which try to secure greater volume by offering cheaper rates.
This is a very healthy development and shows the relatively free market economics of the UAE in operation. It is also yet another reason to believe that the real estate boom rests on far sounder foundations than sceptics propound and that this market has more legs to carry it on upwards. And one of them is the development of the local home finance industry and innovative mortgage products.
At the same time the idea of a real estate boom collapsing at a time of record oil prices, and a $500 billion (Dh1.83bn) surplus is estimated for the GCC countries in 2008, is absurd.
There is too much funding available for property, not too little and until that equation changes the boom will continue and prices head to levels typical of booming cities in the industrialised world and perhaps higher.
That the UAE mortgage sector is expanding and responding to this challenge just explains part of the mechanism of this process, and makes it even more inevitable.