x Abu Dhabi, UAEMonday 22 January 2018

Mortgage cap isn't a danger to growth

If the 2008 crisis taught us anything, it's that slower but consistent progress is far preferable to speedier, unsustainable growth.

Five years after the worst of the economic crisis, Dubai's property market is enjoying a notable resurgence. Selling prices for residential properties are up sharply from last year, by 18 per cent according to one property consultant.

Now, naturally, there is concern that the boom may turn into another bubble, leading to another crisis. Accordingly, the Central Bank has proposed a UAE-wide cap on mortgage loan-to-value ratios. Details are yet to be confirmed but the change will limit mortgage borrowing to, say, 80 per cent of the price of a property.

Bankers consulted by the UAE's banking regulator about the draft law are resisting it. And, as The National reported on Friday, an independent consultancy's study has warned that the proposal could hinder the Dubai property-market recovery by reducing investment, including foreign direct investment. According to the study by Geopolicity, Dubai's GDP, heavily dependent on the property market, could be hurt if the limit takes effect.

In the short term, the mortgage cap may indeed slow down the market. But this should not be overstated. After all, fully 70 per cent of all residential-unit transactions completed last year were paid in cash. In this context cash suggests speculative buyers of properties under construction, hoping to "flip" them for a quick profit. Considering that, measures that will have the effect of keeping speculators out of the mortgage sector of the market are good, not bad. As we have suggested before, other measures that could be considered might include a rule banning resale of a residence within one year of purchase.

On Wednesday the International Monetary Fund, in a statement concluding its annual mission to the UAE, said this country needs to be more cautious about rising debt totals. The recovery of property prices and the improving global economy could give local companies a false sense of security and lure them to a renewed borrowing binge, the IMF cautioned. "In the absence of prudent policies, this could fuel short-term growth at the expense of medium-term stability," the fund said.

The mortgage cap law - like other measures to control bank lending - is much needed. Dubai's property market is thriving right now, but the 2008 crisis should have taught us a lesson: slower but consistent progress is far preferable to speedier, unsustainable growth.