Qatari authorities are considering beefing up lending restrictions for residential and commercial mortgages as a means of taking some of the heat out of the real estate market, while reinforcing codes of conduct and improving consumer protection.
One of the proposals drafted by the Qatar Central Bank (QCB) involves the level of deposits potential buyers must put down in order to be able to qualify for a mortgage. The bank suggests raising this to 30% of the asking price, from the present 10%.
This figure becomes more significant in light of a study conducted by regional financial news provider ArabianBusiness.com. Its Property Survey 2008, released in mid-April, showed that just over 69% of property buyers in Qatar borrowed 71% or more of the purchase price. Of these, 15.38% signed up for mortgages covering 90% or more of the cost of their new property.
The QCB has also proposed that the maximum term of a mortgage for retail borrowers be lowered to 20 years, down from the 30 currently on offer; while the upper limit for repayment by buyers of commercial properties be set at 15 years.
The central bank also intends to reduce maximum installment repayments to no more than 50% of an individual's salary.
If adopted, the proposals will put the onus on Qatari lenders to ensure there are no legal obstacles or encumbrances to real estate projects that are being mortgage financed. The QCB also wants to mandate that all valuations of properties be carried out by court-registered evaluators, a move that would further regulate property prices and help protect buyers.
The package of reforms is expected to reduce the number of property buyers falling behind in their commitments. However, it may discourage some potential customers from taking out mortgages, at least for the time being. The reforms will also lower Qatari banks' exposure to the property market, an issue that has been the subject of concern of late.
A recent study by Kuwait-based investment manager Global Investment House (GIH) said the loan portfolios of Qatari banks have shifted away from public sector borrowing in the past few years, with the focus now on mortgage and consumer lending. In some cases, the GIH study said, these two categories now represent more than half of banks' total loan exposure.
The GIH report, released at the beginning of May, said Qatar's banks should look to diversify their lending away from the present focus on mortgages and personal credits in order to strengthen their base. While banks' loan books remained generally sound, GIH said steep growth in consumer and mortgage borrowing should be monitored with caution. Nonetheless, the report did note that just 1.2% of existing aggregate loan portfolio could be classified as non-performing.
Another warning over Qatari banks' exposure to the real estate market came in a report by Standard & Poor's (S&P) issued in late April. The report said any downturn in the property market or the local economy could hit the country's banks hard.
Some analysts see similarities between the excess liquidity currently present in Qatar's economy and the subprime crisis that affected the US sector last year.
"Qatari banks have been quickly building up untested consumer and real estate loans over the past three years, increasing their vulnerability to an economic downturn or a real estate sector correction," said Mohamed Damak, a credit analyst at S&P.
However, on the plus side, S&P noted the strong financial performance of Qatar's banks, their solid capitalisation, ample liquidity and the likely support from the Qatari government for any lender that experienced difficulties.
The QCB's proposed measures should be viewed not only as a necessary reform of the housing market but also as an exercise in constraining liquidity. Due to the dollar-peg, the QCB is prevented from following the most obvious course of action to halt real estate sector overheating - raising interest rates. Instead, it must use more imaginative monetary policy to constrain the flow of liquidity within the financial sector.
Despite the cautionary tone of analysts such as Damak, the fundamentals of Qatar's current economic situation differ significantly to those present in the US. The chief problem in Qatar is not bad debt, but rather inflation, currently at 13.7%.
The QCB has a difficult path: it must integrate great wealth into a rapidly emerging economy, without the traditional means of controlling monetary supply. The proposed reforms will be an important step in steadying the ship.
