Limits on bank lending to the property sector may help the UAE avoid developing a property bubble, says the chairman of the UK's Financial Services Authority.
Lending cap could prevent next property bubble
Limits on bank lending to the property sector may help the UAE avoid developing a property bubble, says the chairman of the UK's Financial Services Authority (FSA).
Lord Adair Turner said the country could follow the example of the UK, which was setting up a financial policy committee to curb the amount of credit extended to the property sector and sharp rises in property prices. "In the past, people have questioned about how can you tell when a property market is out of control," Lord Turner said. "Two years ago, maybe some people would have said Dubai property prices were not out of control but reasonable.
"That is not good enough and financial regulators now realise the financial system has some deep sources of instability within it." The UK's committee would make a judgement about when the combination of the amount of credit extended to the property sector and the pace of rises in property prices had become unsustainable, Lord Turner said. It would consider the use of macro-prudential levers that would include limits on loan-to-value ratios within property and capital requirement constraints.
UAE officials are keen to avoid a repeat of two years ago when strong inflows of capital to the property market led to the development of a price bubble that proved unsustainable.
The financial crisis eroded demand for UAE property, sending prices falling by about 50 per cent or higher from their peaks in 2008.
There was a sharp rise in the number of loans turning bad as some property owners were unable to make repayments and a number of projects were put on hold.
The property market is still in recovery mode, with prices in Dubai expected to dip further. At the same time, lending has remained sluggish as banks have limited their exposure to the sector. But in September Dubai Islamic Bank took a controlling stake in Tamweel, one of the emirate's two big Islamic mortgage companies. The Government is already considering steps to limit the amount of credit banks can extend. Sultan al Suwaidi, the Governor of the UAE Central Bank, said the regulator was considering the introduction of rules to cap the credit portfolio of lenders.