When is a deal not a deal? The question is timely following news that Barclays bank has won Dubai's first foreclosure case, clearing the way for lenders holding $16 billion (Dh58.72bn) of home loans to take action against borrowers. Mortgage bank Tamweel apparently says three per cent of its Dubai mortgages are in default – and, implicitly, those who agreed to borrow have not fulfilled their part of the loan deal.
The same issues are affecting the property industry across the world, and not just at foreclosure level – sometimes the debt is incurred at an earlier stage.
Almost a year ago there was publicity in the UK when buyers at Pan Peninsula, a prestigious London waterside development, were seeking to negotiate with the Irish developer, Ballymore. The buyers, who purchased off-plan as far back as 2005, were told in 2009 by mortgage valuers that their properties were worth as much as 40 per cent less than they originally agreed to pay.
In Northern Ireland there has been a similar dispute with a developer issuing writs against those who had not completed payments on apartments they bought at the time of the region's property boom.
Barry Gilligan of the developer, Big Picture Developments, seems to have a point when he says that – in good times – fortunate buyers do not share their windfalls with developers. "We have honoured our commitments and we expect purchasers to honour theirs," he says.
"I've never had a situation where I sold someone an apartment for £150,000, they sold it on for £250,000 and they have come back to me and said here is £50,000 back, thank you very much. The market has turned, but what people need to realise is property is not a short-term investment and in the medium and long-term the quality of the investment is going to come through," he says.
It's tough love but it shows how property works – and it is not a one way street. So while evidence suggests that most property prices do indeed rise over time, the point to remember is 'over time'. Rises are not always happening, and if your timing is wrong (even if that is not your fault) then you suffer losses.
In recent weeks in the UK, a landmark court ruling determined that a buy-to-let investor should pay damages of over £130,000 after walking away from an off-plan deal. The developer, called Prestige Homes, was awarded damages after the investor pulled out of a deal to buy two flats at a 122-unit development in Plymouth.
The UK is braced for many more examples, as another 300 similar cases are expected to reach court – or perhaps, in the light of the Plymouth decision, reach out of court agreement – in the next few months. Telford Homes is reported to be pursuing 30 cases and Imagine Homes (which is now in administration but which had a representative in Dubai) is believed to be pursuing 40 cases.
Prestige Homes has gone on the record saying that buyers who could no longer find a mortgage to buy at the 'old' cost could, perhaps, have continued with the purchases and rented out their new units until the market improved. Again, whether we like it or not, the developer has a point.
It is sobering to think how many people have made losses or are on the edge. A recent report in the UK by Shelter, a homeless charity, suggests that literally millions of people are paying their housing costs with their credit cards – implying that their household budgets are perilously close to defaulting.
The highest proportion of those who pay their rent or mortgage through credit card were from working class professions (eight per cent of those in the C2DE social grouping), but the poll also showed that middle/upper class (ABC1 category) are also falling victim, with four per cent of respondents saying they use credit cards in this way.
The Dubai and UK examples here are the tip of the iceberg. It's the same story all over the world. It's tough and can ruin some people's lives, at least for a short period. Everyone has a moral responsibility in this. Those in debt should pay and developers, estate agents and courts should help by rephrasing schedules, for example. But that is already happening in a lot of cases.
We don't complain when we all make money from property. Now we happen to be in a period when we see the downside of the system we call capitalism – and we have to cope with it.
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