REAL ESTATE

The New Year will bring little cheer to house hunters who, as they ushered in 2013, will have learned they may need to double their deposits as a result of a new mortgage lending cap, writes Sean Cronin of The National.

Regulation can move like a pendulum—overcorrecting weaknesses in a market and creating further structural weakness in the process. The enforced cap on loan-to-value ratios threatens to do just this, analysts observe.

It emerged this week that expatriates will only be able to borrow up to 60% for their first home purchase and 50% for subsequent purchases. At the same time, financing for Emiratis was limited to 70% for the first home and 60% for further properties.

The move will hit the very people it aims to protect—home buyers saving for deposits to buy houses they want to live in. The aim may have been to protect the market from the excesses and exuberances of the past. But it is unlikely to achieve that outcome.

A note from Bank of America Merrill Lynch to clients this week makes this point, warning that loan to value limits are likely to affect end-user affordability instead of curbing speculation.

The New Year's Eve news would have landed like a bombshell for anyone in the process of buying a home, and to a lesser extent anyone even thinking about it. For the investor buying an average three-bedroom villa in Dubai for Dh2.7 million ($735,094) this change would mean finding an additional Dh400,000 under the mattress.

Many mortgage-financed purchases will simply fall through—hitting prices and derailing a recovery that was beginning to boost consumer confidence in the wider economy. VTB Capital said that Dubai property transactions could fall by as much as 60%, with prices dropping 20% if the guidelines were implemented in full.

While it is sensible for regulators to prioritize policy aimed at curbing the sort of rampant speculation that led to one of the most dramatic property crashes in the world four years ago, the collapse of house prices in 2008 was not about loan-to-value ratios.

It was about an off-plan funding model that permitted multiple house purchases only on the strength of a deposit—even before a mortgage had been secured—and the onward flipping of such purchases. That created a 42% increase in prices in a single three-month period at the start of that year. The system worked in much the same way as a pyramid scheme.

A lack of due diligence on the part of banks and developers, the absence of credit checks on investors, and a media that failed to point out that the property speculation emperor looked rather underdressed, perfected the storm.

Four years later, many analysts have been dismayed by the trumpeting of relaunched projects by some developers and the eager phone calls to journalists alerting them to queues forming outside their offices with every new launch. Here we go again, we all thought. It was only a matter of time before the bragging brought a response from the regulator.

But end users, not speculators, will be paying the price. It is an extension of a narrative that has also seen end users underwrite the losses incurred by banks from dealing with speculators who skipped the country after the last crash.

While interest rates fell, many mortgage customers were locked into paying rates of between 7% and 10%—even when they had signed up to products sold as tracking either the Fed Funds rate or Eibor.

Many are still unable to tap more attractive deals, trapped by penalty clauses that will be triggered by a transfer of a mortgage to a rival lender. However, these practices have not yet been satisfactorily addressed by the regulator.