Dubai home loan debt incredibly low
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Dubai’s sovereign debts have come under the microscope this week but nobody has highlighted the most unusual thing about debt in Dubai: less than 20,000 homes in this city actually carry a mortgage. This is incredibly low in global terms, and reflects the newness of the local real estate market.
In developed economies across the world it is the high levels of mortgage debt that are weighing them down. The whole problem in the global financial system stems from falling house prices and its impact on home loans and bad debts for the banks. Dubai does not have this problem, or no more than a tiny fraction of the housing debt now bringing the world to its knees.
Low mortgage debt
It is surprising no other commentator has so far chosen to point this out. All the talk is about sovereign debt, housing debt has been forgotten in analyzing the outlook for the Dubai economy.
The chairman of the Dubai International Financial Center, David Eldon, came close yesterday when he reminded the DIFC Week conference: ‘The reality is that Dubai is not built just on credit. Dubai’s growth has been largely equity financed rather than debt financed.
‘The reality is that Dubai’s debt is also very different from the indebtedness seen in markets like the United States. Debt there has gone to finance deficit spending and increased consumption. Debt here has been largely channelled into financing infrastructure and public utilities – investments that will be self-paying investments that increase productive capacity and enhance productivity growth.’
$80bn non-mortgage debt
Yes, that is true and explains the $80 billion now owed by Dubai after its recent boom. But is not the absence of the mortgage drag on the local economy far more important? How rich would the UK or US feel without its huge burden of housing debt?
That of course is the next stage in the development of Dubai, and neighboring Abu Dhabi is only a couple of years behind. And why will the population of Dubai and Abu Dhabi decide to take on mortgage debt?
For the same reason that the middle classes around the world have taken out mortgages: to avoid paying rents which rise with inflation, and to accumulate capital. Home ownership is the bedrock of middle class families around the world, and it has yet to take root in the UAE. It will.
Yesterday saw the launch of Abu Dhabi Finance, a major new UAE mortgage provider backed by Abu Dhabi Commercial Bank, Aldar Properties, Sorouh Real Estate, Mubadala and the TDIC, all state-controlled entities. It will initially provide up to 85 per cent loan-to-value- ratio loans in Abu Dhabi with loan periods of up to 30 years.
Meanwhile, the formation of the Emirates Development Bank to offer home finance – and takeover existing Dubai home loan companies, Amlak Finance and Tamweel – was announced earlier in the week. The UAE is going to get its mortgages but is not yet in housing debt like the rest of the world.
Hi Peter, interesting blog you have here, congratulations.
There have been three main reasons why there are so few mortgages in the Dubai market:
1. Lack of a real secondary market – the demand has far outstripped demand over the last 4-5 years during which the price of real estate has reached levels where mortgages are required.
2. Duration mismatches from banks/mortgage companies – no real long term debt structure makes it difficult to have 15-25 year mortgages, a lack of a fully completed credit bureau also makes things difficult
3. The off-plan model. This is where you have seen the effects of the liquidity crunch come through most clearly. The majority of off-plan purchases are funded as real estate loans rather than as mortgages, with historically up to 95% loan to value ratios. With these coming down to 50-75%, many high net worth individuals are having difficulty paying the upcoming installments on, say, their Nakheel villas as their assets remain rather illiquid (this has also been a contributing factor to the dramatic drop in the stock market – the only liquid asset that can be sold at will this month!)
For those that have purchased properties in the last year, this isn’t so much an issue as they will most likely walk away from their purchases. For those that purchased last year and before, they will already have significant equity and will still be sitting on unbooked profits following the huge ramp up this year.
For this reason, the formation of the Dubai and Abu Dhabi mortgage banks are an important step for the UAE property markets. State banks are cutting back on LTVs and not passing on the benefit of the lower funding rates they receive to end clients. EIBOR is a broken system (look at the banks that constitute it, no wonder its so high!), with real interbank lending closer to the 1-2% level and the additional government deposits being used by the UAE banks to take their loan/deposit ratios below 100% by freezing lending (of course, they take these deposits at 4% and place them in deposit accounts at EIBOR + 2-3%, instant profit).
These institutions should allow the government to inject liquidity directly into the off-plan funding system and provide the bridge required for these investors until the personal loan market begins to stabilise. That is, if they want to.
A final thought: landlords in the UAE are going to have to move toward the monthly rent payment system, the current system of one cheque for the entire year is unsustainable.
All the best,
Emad
Emad Mostaque
November 30, 2008 at 3:12 am