Lessons from the past: Efforts are being made to prevent the creation of a housing bubble

If real estate bubbles divide into two simplistic categories – sellers’ deception and buyers unwilling to heed available information – then Dubai’s problems of four years ago were of the latter kind. In the US and elsewhere, mortgage salespeople propagated the idea that property ownership, often at unsustainable mortgage rates, was the key to future financial success. In Dubai, speculators with a keen nose for a quick profit, but little interest in purchasing a long-term property, were entering the market with the intention of buying a unit and then selling it again once the price had risen sufficiently.

While the Americans are still grappling with how to squeeze these unscrupulous practices out of all level of the financial system, the Dubai authorities have introduced a series of measures aimed at protecting the country’s inhabitants from the perils of speculation, while tightening the home-buying rules to reduce the incentives for unwise risk-taking.

The rocketing home prices seen in the second quarter of 2013 prompted fears of another bubble in the making and also saw a return to the advance property sales – buying off-plan – that did so much damage earlier. So-called buyers could reserve a unit in a building that was perhaps no more than a brochure and an architect’s drawing for as little as a few thousand dollars. After only a few weeks in some cases, the still non-existent property was judged to have a higher market value and the reservation could be sold “as a good investment” to someone else. The practice became so widespread that one developer was prevented from cancelling a project, as the list of off-plan buyers was very different from those who had originally paid a deposit. When the developer tried to repay the deposits it had received, some of the reservation holders objected because they had paid far more as the property flipped from one buyer to another.

FLIPPING: A series of measures in 2013 to inject stability into the real estate market included a move by Dubai’s largest developer, Emaar, to ban flipping. Real estate agents have been banned from reselling any real estate held under their names until the property has been completed and handed over. Likewise they are barred from buying completed properties until they have been generally available for 14 days. However, individual buyers who regularly buy and sell are much more difficult to keep track of. “We are trying to control flipping,” Emaar’s chairman, Mohamed Alabbar, told local press. “We have a mainframe [ computer] system that is incredible – if you buy and you flip within 30 days, the system will never allow you to come and buy with us again. But people are very smart – they bring in their friends the next time and it goes on and on. These guys buy an apartment and sell it after two weeks – so you have to watch it.”

TRANSACTION FEES: Another move to put a lid on speculation was made by the Dubai Land Department (DLD), which in October 2013 doubled the transaction fee from 2% to 4% of the value of the property. The DLD’s director-general, Sultan bin Mejren, told reporters the change would apply to residential and commercial properties, including those sold before they are built, but it would not be retroactive and would not affect industrial real estate.

“This decision will limit quick property speculation, which is harmful to the market,” bin Mejren said. “The market is recovering and we want to help boost stability and sustainability.” He added that Dubai would introduce further regulations later.

Even at the new rate, the property-sales tax measures hold up well to global comparison. In Britain there is a range from 4% to 15%, while people in France pay 6% and those in Japan pay slightly less, at 5.8%.

MORTGAGE CAPPING: Restricting access to credit was one further tool brought out against the speculators. Although potentially effective against people who need to resort to obtaining loan approval if not the loan itself, it clearly does not work against speculators who use cash. The IMF said that since “much” home buying in the UAE was done with cash rather than mortgages, the mortgage rules would need to be complemented by other measures. There is no central figure for cash transactions, although some industry players claim it is as high as 80%.

The first attempt by the central bank to institute mortgage caps was withdrawn after banks complained that their businesses would suffer too much. The second set is based on different criteria for nationals and expatriates, as well as whether the property is a first or second home and its value.

For first homes under Dh5m ($1.4m), loans are now capped at 80% of value for UAE nationals and 75% for expatriates. These percentages fall to 70% and 65% for higher-priced properties. Loans for second homes will be limited to 65% of value for UAE citizens and 60% for expatriates. Loans for off-plan units will be capped at 50%, irrespective of the property price or nationality of loan applicant, and there will be no loans for third homes. Mortgages will be limited to the equivalent of seven years’ income for an expatriate, and eight years for a UAE citizen.

Harald Finger, IMF mission chief to the UAE, reportedly suggested that one solution might be to introduce fees on real estate market activity if property prices continue to surge.

CREDIT BUREAU: Equally a credit bureau, proposed to start operations in the UAE in the first quarter of 2014, has obvious uses for keeping an eye on reckless loan patterns, though it too would do little to calm property speculation among cash purchasers. Abdul Aziz Al Ghurair, the head of the UAE Banking Federation (UBF) and CEO of Mashreq Bank, told reporters, “Once the credit bureau is applied, there will be no lending to anybody for six to 12 months because the banks will find out who’s really been borrowing and how much. They will find out those people who have four or five credit cards.”

The Central Bank of the UAE has been working with the banking industry, led by the UBF, to establish the Al Etihad Credit Bureau. Al Ghurair said the banks had begun compiling information on account holders to assess their creditworthiness.

FUNDAMENTALS: It may be that a report by the Standard Chartered Bank came closest to providing hope for avoiding a repeat bubble. The report, authored by Standard Charter analyst Carla Slim, said, “The housing market is expanding on the back of improving fundamentals not speculation, and a number of factors, including subdued mortgage growth, low off-plan sales and increasing housing regulations, differentiate this price rally from the one in 2008. Slowly but steadily, confidence has returned to the market.” Standard Chartered added that the 2008 price boom was very much influenced by short-term speculative activity, especially on off-plan properties, for which the deposit was only 10% of the value. The report highlights that now the housing market is being influenced by broader economic trends in the emirate.