“Mortgage cap would be good for the UAE in the long run”- Jones Lang Lasalle

“Mortgage cap would be good for the UAE in the long run”- Jones Lang Lasalle

As the UAE Central Bank does a 180 on the mortgage cap proposal and commercial banks release a collective sigh of relief, experts say mortgage cap can help reduce speculation and bring stability into the market

January 23, 2013 11:55 by Eva Fernandes

Earlier this month, the UAE Central Bank sent a circular to commercial banks in the UAE stating mortgage loans for expatriates were not to exceed 50 percent of the property value of the first purchase and 40 percent of the purchase that follow. For Emiratis, on the other hand, mortgages have been capped at 70 percent on the first purchase and 60 percent on other purchases.
The circular caused much resistance and reports of special meetings between the Central Bank and the commercial banks emerged for the few weeks that followed. The case being made for the postponement of the imposition of the cap, was successful and just yesterday UAE state news agency WAM released a statement from central bank governor Sultan Nasser al-Suweidi saying the cap will not be enforced and that it “was merely intended to help banks prepare for eventual rule changes which would reflect their feedback.”

As sudden as the decision to impose the cap may have been, some argue that regulation from the Central Bank is an important step especially as the UAE real estate market picks up. “Regardless of the percentage of the cap, it is actually a good long term trend to have some caps on the mortgage market, it can help take some of the speculation out of the market and bring some stability into the market long term” said Craig Plumb, head of research in the Middle East and North Africa at Jones Lang Lasalle.

Should the mortgage cap was imposed, there would have been a clear switch in the market from long term financing towards cash-buyers. It could also lead to a greater demand for smaller units or cause developers to hold on to units and rent them out instead of selling. Essentially, the cap would help take the speculation out of the market. Coming out of the crash, avoiding the formation of another property bubble is both prudent and important—because there is definitely a massive appetite for the same.

According to Gulf News, since the proposal of the mortgage cap has been disregarded there has been an increase in the amount of sales. The paper spoke to a Dubai Municipality official, who wished to remain anonymous who said: “We witnessed a hike in sales as of the beginning of this year. As of January 21, 2013, we have witnessed transactions amounting to Dh490 million compared to mere Dh200 million for the same day last year, a rise of 160 per cent.”