x Abu Dhabi, UAETuesday 25 July 2017

Central Bank mortgage caps would hit Dubai GDP, study warns

Mortgage caps planned by the Central Bank risk eroding Dubai's GDP by up to almost 3 per cent and hindering the recovery in the property market, an independent study has warned.

The Central Bank last month referred its draft law on mortgages back to the UAE's banking sector for consultation. Pawan Singh / The National
The Central Bank last month referred its draft law on mortgages back to the UAE's banking sector for consultation. Pawan Singh / The National

Mortgage caps planned by the Central Bank risk eroding Dubai's GDP by up to almost 3 per cent and hindering the recovery in the property market, an independent study has warned as the IMF called for more measures to be put in place to prevent another asset bubble.

The regulations had the potential to curb foreign direct investment and lead to an outbreak of fresh volatility in prices, according to Geopolicity, a Dubai-based management consultancy.

"The proposed caps will have an impact on GDP as the economy, especially in Dubai, is heavily dependent on the real estate market," said Peter Middlebrook, the chief executive of Geopolicity. "There are lots of other potential measures that can help to regulate the market and the risk with the caps is that you put off investment in property from families who want to buy a home and contribute to a sustainable economy in the long term."

The Central Bank last month referred its draft law on mortgages back to the UAE's banking sector for consultation. It follows the regulator announcing in December that it intended to cap mortgage loan-to-value ratios.

The action comes as the emirate's property market stages a resurgence after prices crashed by more than half from their peak of September 2008. Residential sales prices in Dubai rose by 18 per cent in the first quarter of the year compared to the same period of last year, according to the property consultant Jones Lang LaSalle.

"The Government's intention to tighten its grip on the sector holds the potent risk of overregulation and negatively influencing price signals, thereby creating inefficient allocation of resources and losses to the economy," the report said.

It added that the current growth trajectory in the UAE was not necessarily the same as during the pre-2007 to 2008 period.

The ratios of any proposed caps are still uncertain. The initial caps, outlined in a circular distributed to lenders in December, set the loan limits at 50 per cent for expatriates and 70 per cent for Emiratis for initial purchases. After an outcry from banks, the proposed limits were eased to 80 per cent for Emiratis and 75 per cent for expatriates. Ratios for subsequent homes would be 60 per cent for expatriates and 65 per cent for UAE nationals. But a final decision is expected to emerge later this year.

Given that the property sector contributed 13 per cent to overall GDP, Geopolicity said the originally proposed caps would have dented national GDP next year by between 0.7 and 1.4 per cent. Dubai GDP would have been hit by between 2.8 per cent and 5.8 per cent.

Even if the lower limits were introduced, the impact on Dubai's GDP could be as much as 2.8 per cent, said Swapna Nair, a Geopolicity economist and one of the report's authors. Geopolicity based its findings on mortgage data from the Dubai Land Department. About 30 per cent of property investments in the UAE were dependent on mortgages, it said.

In a statement concluding its annual mission to the UAE, the IMF on Wednesday said the mortgage cap proposals, together with other plans to control bank lending to government-linked firms, would help to mitigate property-related risks. But the immediate effect on the residential market, largely a cash market, would be limited.

Other measures should also be considered, it the IMF said.

"This could include targeted increases in real-estate related fees, which would help limit speculation in the market and also generate revenue in support of fiscal consolidation," said Harald Finger, the IMF mission chief for the UAE.

Geopolicity agreed that other possible measures should be looked at by the UAE including duty on properties resold within 24 months of initial purchase, income assessment measures to prevent mortgage defaults and fixed-rate mortgages rather than adjustable-rate mortgage loans.

 

tarnold@thenational.ae