Regulator Stifles Risky Lending That Fueled Dubai Bubble

The United Arab Emirates central bank capped the size of mortgages that banks in the country can offer as it moves to avoid a repeat of a property bubble that caused values to plummet after 2008.

Foreigners can borrow 75 percent of the value of a first home priced at 5 million dirhams ($1.36 million) or less and U.A.E. nationals can get 80 percent, according to a document circulated by the bank yesterday and seen by Bloomberg. The limits are 65 percent and 70 percent, respectively, for homes worth more than 5 million dirhams.

Dubai, the second-largest of seven sheikhdoms that make up the U.A.E., saw home prices surge at the fastest pace in the world in the second quarter, stoking concern that another property bubble may be growing. That prompted the emirate’s government to double real estate transaction fees to rein in speculation. Dubai suffered one of the world’s worst property crashes in 2008 when speculators fled the market and saddled banks with unpaid loans.

The regulator capped mortgages for second homes and investment properties at 60 percent of the value for expatriates and 65 percent for nationals regardless of the price. Buyers of properties before they are built can borrow no more than 50 percent of the value “given the long-term nature of the development process and the higher level of risk to completion,” the regulator said. Advance sales, known as off-plan, were seen as a main cause of the previous property bubble.

‘Right Direction’

“This is an important step in the right direction,” Sultan Bin Mejren, director general of Dubai’s Land Department, said in an e-mailed statement. “Setting the highest and the lowest ceiling for lending contributes to protecting the market from falling into the errors of uncontrolled lending.”

In another measure to clamp down on practices that inflated Dubai’s property market in the past, the central bank banned down payments financed by personal loans and credit cards.

“The central bank expects mortgage loan providers to be explicit in this regard to ensure the borrower has an appropriate level of financial interest in the collateral,” the bank said in the document.

The central bank shocked lenders on Dec. 30 when it circulated a notice saying the loan-to-value ratio on mortgages to expatriates would be capped at 50 percent for first properties. Banks resisted restrictions, prompting the regulator to agree to negotiate the limit with lenders.

Wrong Target

“Whilst the regulation is clearly good for the market, it is unlikely to have a fundamental impact on current price growth,” Matthew Green, head of United Arab Emirates research at CBRE Group Inc. said in an e-mail yesterday. The controls may hurt demand from people who buy homes to live in themselves even though those buyers “should be encouraged,” he said.

The majority of transactions on completed properties in Dubai are done with cash, limiting the regulator’s ability to halt average price growth. The new limits may slow the recent rise of advance, or off-plan, transactions.

“Further regulation of the off-plan market is still required to help reduce price volatility and reduce the negative impacts of speculation,” CBRE’s Green wrote.

The regulator also set the maximum length of a mortgage at 25 years and prohibited lenders from using end-of-service benefits when calculating the borrower’s income. The value of a mortgage shouldn’t exceed eight years annual salary for an expatriate borrower and seven years for a U.A.E. national, according to the regulations.

Penalizing Buyers

“The tools being used to cool the market are not the right ones and will only penalize end users and help raise the prices at the lower end of the market,” said Warren Philliskirk, associate director at Mortgage International, a Dubai-based broker. “It may also push banks out of the mortgage business if price is all they can compete on.”

A more effective weapon against speculation would be fees or taxes that vary depending on how quickly a property is sold, he said.

Emaar Properties PJSC, the country’s largest publicly traded developer, fell 0.2 percent to 6.08 dirham at 1:08 p.m. in Dubai. Aldar Properties PJSC, Abu Dhabi’s biggest developer which acquired its smaller rival in June, gained 1.1 percent.

The mortgage rules are a “tad tighter than we expected” though the effect on loan growth will be limited, Jaap Meijer, the Dubai-based director of equity research at Arqaam Capital Ltd., said by phone today. No banks “will get out of the mortgage business” due to the new limits because the loans are comparatively low risk.

Arqaam expects mortgage lending in the U.A.E. to grow around 10 percent annually for the next few years, Meijer said.

Before it's here, it's on the Bloomberg Terminal.