House hunters would need to double their deposits under tough new mortgage lending rules that threaten to derail the property market recovery.
The Central Bank has capped lending to mortgage customers as part of a raft of new rules aimed at avoiding another property bubble.
The rules, which have been under consideration since the onset of the Dubai property crisis, limit financing for nationals to 70 per cent for the first house, and 60 per cent for any further properties. Expatriates can borrow up to 50 per cent for the first house and 40 per cent after that.
Brokers have warned that the new rules could dampen demand and hit prices hard.
"It is going to slow things down," said Ryan Mahoney, the chief executive at Better Homes in Dubai. "I think it's healthy to put some sort of policy in place to ensure the market doesn't overheat. But it has been a bit too severe."
It means that homeowners who would have put down about Dh400,000 (US$67,509) for a Dh2 million property under existing market rates would need to instead fork out Dh1 million to buy the same property. Analysts say that could prove too much for many investors.
The new rules will include a limit on the maximum loan amount that a bank can lend to an individual for a property, a maximum tenure for the mortgage, rules to govern property lending to nationals in retirement, and rules to ensure transparency of fees to protect consumers.
"The regulations aim to protect both lenders' and consumers' rights, and at the same time making a distinction between the owner, an investor and the resident," said a Central Bank spokesperson. "There needs to be a distinction made between buying a house to live in, versus buying a house as an investment."
The circular, which has come into effect yesterday, precedes a comprehensive set of rules that will be introduced in the first quarter aimed at regulating mortgage activity in the country.
"It was only a few years ago where locals borrowed beyond their means, expatriates bought villas and fled the country, leaving the banking sector heavily exposed to the property downturn and mired with legal cases," the official said.
House prices soared before the downturn and credit crunch hit the market in late 2008. Speculators buying and selling property beyond their means were partly blamed for the collapse.
Property prices have recently recovered in popular locations in Dubai, such as The Palm Jumeirah and the Marina District, Jones Lang LaSalle said in a report in December.
In the capital, standard beach villas on Saadiyat Island with prices starting at about Dh6.2 million have seen "a lot of interest in the last couple of months", said a recent buyer, speaking on condition of anonymity. "The resurgence of asset prices in Dubai is adding to that feel-good factor," the buyer added.
A Dubai bank executive, who declined to be identified because of the sensitivity of the issue, said: "There was no consultation, it took everybody by surprise when it arrived yesterday. There was no implementation date given by the Central Bank.
"As you'd expect, the banks are in discussions with each other as to how to respond. What's a reasonable loan-to-value ratio for mortgages? Most believe 50 per cent would be damaging to the banking business and the healthy development of the property sector.
"You don't need to go as low as 50 per cent to stop another property bubble. We need a bit more latitude."
Some banks have already adopted more stringent attitudes to mortgage lending. Robert Crossman, the head of retail banking at HSBC, recently told The National that banks in the region had changed since the financial crisis and were now much more risk averse.
"Customers must be screened to ensure they can afford lending products, and we'll be sensible too. For example, maximum loan to value rate for a mortgage is 80 per cent, but our average is 60 per cent," he said.
Last year, the banking watchdog moved to restrict excessive financing for vehicles.
It placed an 80 per cent limit on lending, requiring consumers to find the remaining 20 per cent.
"You had UAE national youth excessively in debt, buying a car that is way beyond their means, with almost half their salaries spent on their car - there was no financial management," the Central Bank spokesperson said. "Now we've seen a restructuring of the market, with those products going towards those who really can afford it. It's not a bad thing."
Dubai's benchmark declined yesterday, after several sessions of consecutive gains, weighed by property and financial stocks.
Emaar Properties, which developed the Burj Khalifa, fell 1.5 per cent after three sessions of consistent gains, closing at Dh3.75. Deyaar Development, another publicly listed developer, lost 1.9 per cent to 35 fils. Arabtec Holding, the emirate's biggest contracting company, fell 0.8 per cent to Dh2.22. Tamweel, the mortgage firm complying with Sharia rules, lost 1.7 per cent to Dh1.14. Abu Dhabi's Sorouh Real Estate fell 0.7 per cent to Dh1.25.
Equity analysts echoed concerns that the new regulations will dampen the recent improvement in investor interest for property - cutting into profitability projections for the sector.
"It's a little concerning," said Saleem Khokhar, the head of equities at National Bank of Abu Dhabi. "It will definitely have an impact if it goes into law, on the banks and property sector. Sixty and 50 per cent for expatriates - that is high."
Clarification: According to the UAE Central Bank, the new limit on mortgage borrowing for expatriates is 50 per cent for the first property and 40 per cent for subsequent properties, not 60 per cent and 50 per cent as originally stated in this article. This story was amended on January 6 2013.