Lower cost mortgages now essential to sustain Dubai boom

25/11/2006

The high cost of local mortgages in Dubai leaves room for lower rates to follow that could sustain Dubai house prices even in a market downturn. For as this start-up real estate market moves to greater maturity the mortgage sector is the key to reaching international real estate price levels and sustaining them.

Property markets are driven by two things: supply and demand, and finance. In Dubai the issue of supply and demand is often debated but the importance of the availability of mortgage finance and the cost of that funding is sometimes overlooked.

Yet mortgages become more crucial to sustaining this market as so much property starts to be completed and ready for owner occupation. In short, people have to be able to afford to buy property, and the cost of money is the critical factor in determining whether they do or do not.

This the next challenge for the emerging Dubai mortgage companies and their growing band of international competitors. At present mortgage rates are high by international standards. Tamweel is advertising a monthly mortgage payment of $5,000 on a $565,500 Marina Mansions apartment in the Dubai Marina.

Mortgages cost too much

For the average Dubai executive this monthly payment is outside of what they can afford, average salaries are just not this high. There are reasons why this payment is so high: dirham interest rates are higher than dollar interest rates; the length of the mortgage is shorter here than in advanced markets; and this includes capital repayments and is not an interest-only loan.

Now in advanced markets lenders have been criticized recently for being too lax in home lending standards. In Dubai the reverse criticism could be made, albeit for good reasons in a start-up market as the mortgage companies are starting from nothing and have to build up their critical mass.

However, with international lenders now active in the Dubai market, and more set to enter, there is plenty of scope for healthy competition. Indeed, a broader and deeper local mortgage market is essential if the local market is going to soak up the upcoming supply of new property and to sustain and even improve property values at the same time.

Competition has other benefits. The recent imposition of early repayment penalties by local mortgage companies smacked of moving the goalposts after getting people to sign-up, and has won the international banks new customers. Buyers now have a choice of lenders and not a local duopoly.

Making it cheaper to buy

Yet the most important thing is for the total cost of ownership in terms of mortgage payments to come down in Dubai. Current levels of monthly repayments are going to adversely impact on the market as the supply of accommodation booms unless something is done.

That help might also come from the unlikely source of the US housing market which has entered a major crisis since the summer. For if the Federal Reserve lowers US interest rates to compensate then the dollar-pegged dirham interest rates will follow suit.

But the current position in the Dubai mortgage market could be viewed as an opportunity for it is depressing price levels, and logic suggests that a world-class home finance market would sustain world standard prices.