The price of homes ballooned in response to the demand of the millions of new homebuyers entering the market, but as the economy slowed, the bubble collapsed.
Ensuring that a correction is not a crash
You need only open this newspaper or turn on the television news to find out what can happen when a property bubble bursts. You needn't understand collateralised debt obligations, the FDIC or any of the jargon to know that the disaster that has befallen Wall Street and spread through world markets all began with the collapse of a property bubble. In the US, obtaining mortgages became too easy and too many homes were sold to those who could not really afford them. The price of homes ballooned in response to the demand of the millions of new homebuyers entering the market. But as the housing market became oversupplied and the economy slowed, the bubble collapsed, financing dried up, and in some American cities the price of homes has already fallen by 30 per cent.
Is this inevitable here? Not necessarily. While the property market in Dubai is clearly tightening, the slowdown need not be so drastic or its ramifications so severe. Gradual decreases in the amount of financing provided to homebuyers and limits on speculation are both important steps to help to temper the market. Such measures will help prices to adjust gradually, rather than fall off a cliff, as they have done in other parts of the world. While higher income requirements for financing and higher down payments may concern new homebuyers and shock those accustomed to the recent days of freewheeling speculation, the American example should serve as a lesson that long-term growth cannot be sustained when mortgages are so easy to come by. But finding the right balance is essential - by no means can an abrupt end to property financing occur.
The crisis of liquidity that many banks face in a global credit crunch is a separate phenomenon from a bank's wilful tightening of financing requirements. The UAE Central Bank, by supplying Dhs50 billion in loans to local banks this week, has ensured that even as loans and credit have become more difficult to obtain throughout the world, banks in the UAE still have the capacity to obtain loans themselves. Only when banks can borrow will they be able to provide the prudent financing to able buyers that will buoy the market in a time of uncertainty.
Most lenders appear to understand that in order to maintain long-term confidence in the markets, wild swings in prices must be avoided. As we report today, some of the banks and mortgage lenders that once provided up to 95 per cent financing have reduced their financing to 70 or 75 per cent. This will discourage speculators, many of whom purchase multiple properties only to sell them again at a higher price. This has distorted demand and created artificially high prices that cannot be sustained.
But middle-class families, the engine of any nation's economic growth, should not be shut out of the housing market along with the speculators. Middle-class buyers should also benefit, though perhaps not immediately, as less speculation allows prices to settle at more reasonable levels and developers build more modest developments suited to this growing market. Tamweel has already revised its strategy to focus more on middle-income housing in the coming years. "High-end and luxury units are out of the picture," said Nabil Abu Alwan, head of marketing and product development. This is a dramatic change in the UAE's property market in a month of drastic global economic shifts. But none of it should change the fact that the UAE is a great place to buy a home and build a future.