New regulations that limit how much banks in the UAE can lend to mortgage customers are expected to result in a slowdown in already weak credit growth and could also hit bank profitability.
The rules, announced by the Central Bank in late December, would limit mortgages to 50 per cent of the value of a property for expatriate buyers, or 70 per cent for Emiratis. If the purchase is a second home, the amount that can be borrowed drops to 40 per cent for expatriates and 60 per cent for nationals. Previously, homebuyers could put as little as 5 per cent upfront on a purchase.
Loan growth in the UAE has dropped to around 3 per cent for the 12 months to October. Private sector credit growth is even slower, barely moving in the first eight months of 2012, compared to a peak of almost 60 per cent in late 2008.
Although there has been much talk about a recovery in the Dubai real estate sector, mortgage lending across the UAE has been fairly stagnant during 2012. By the end of August it was up less than 1.5 per cent compared to 12 months earlier. In late 2008, it was growing at around 100 per cent. Mortgage lending is also a very small part of bank lending, accounting for less than 15 per cent of total loans. It is a high-yielding asset though, which has led banks to start trying to lobby for a change in the rules. Banks complain that the new restrictions would limit the number of buyers and how much they need to borrow, cutting bank profits on mortgage lending from two angles.
A meeting was scheduled for 16 January for bankers to agree a position to take to the central bank. It is expected they will suggest changing the loan-to-value limits to something in the 70-80 per cent range.
Banking industry sources say the central bank introduced the rules to curb speculation and avoid a second real estate bubble emerging after only just starting to recover from the 2009 price crash. It is far from clear that it would achieve that aim. Large numbers of cash buyers come to Dubai to speculate on property prices and they will still be in a position to continue doing so. What it would achieve is protecting banks from booking heavy losses on another real estate crash as a fall in prices would just eat into the buyer’s equity.
The announcement is also the latest regulation to come out from the central bank that intends to improve the health of the financial sector, but sparks widespread confusion. Earlier in December, the regulator delayed indefinitely plans to cap lending to the government and government related firms, among other rules, after banks complained they needed more time to implement the directives.