In a move which is sure to cause panic and confusion in the Dubai property market and other property markets in the region it has been revealed that Dubai Bank has suspended all approvals of secondary market mortgages although it will still lend money to off plan developments. The move was a surprise to many but there are reasons why it has possibly been on the cards for some time.
Anyone who has even the slightest interest in property will know that the Dubai property market has been something of a hot spot for some time now, attracting hundreds of millions of pounds of investor’s and developer’s money at a time when the economies of the west have hit trouble to say the least. Until recently the area was seen as something of a safe haven but that has proved to be untrue as the cancer which is recession continues to gnaw away at the worldwide economy from within. No one property market is completely safe!
This extra injection of cash into the Dubai property market has been well received and on the whole well handled by the Dubai authorities who have shown they are not afraid to take the tough decisions when required. They have introduced a number of new regulations and changes to market practice of late with rent caps being the more prominent of recent changes.
The market has cooled a little of late and the once widely held view that the market would slow in 2010 when demand and supply crossed over has changed. It seems that the timescale in question has shortened considerably over the last few weeks.
What affect will the suspension have on the secondary market?
The suspension of finance to the secondary property market – i.e. the resellers market – will have a massive impact after in affect taking away the very food which ensures the market stays strong and healthy. While it is just the Dubai Bank which has suspended secondary mortgages at the moment, with Lloyds Bank said to be still offering the service at the moment, there is very little doubt that the rest will follow.
There have been rumours of liquidity issues in the region for a short while now and even though it seems hard to believe that cash flow could be an issue in the richest region of the world, much of it is down to liquidity in the international money markets. Suspending secondary market mortgages is a big step but it is one which could eventually ensure that the Dubai economy and property markets are protected from the full force of the credit crunch.
By taking away the finance required to keep the market flowing it will in fact cut out reckless borrowing and see the number of bad debtors stay under control, at least for now.
Why was the off plan market exempted from the suspension?
There may be some confusion in the markets as to why the off plan property market was exempted from the suspension, but this is actually a very shrewd move on behalf of the Dubai Bank. The suspension of funding to feed the off plan market would not only have led to an affective freezing of the market but it would have pushed many developers into serious financial trouble. The extended impact this would have had on the wider economy would have been severe and seen the Dubai property market take a massive step backwards when it has been pushing forward of late in leaps and bounds.
The fact that this vital source of finance is still available, for now at least, will actually highlight the off plan market a little more and could see those who had shown interest in the secondary market now move over to the off plan arena. This could actually be a very shrewd move because traditionally the off plan market – where new build costs are normally high – would have been the first to be hit by an economic downturn.
Investors would have pulled back because of the extend risk of a developer hitting financial trouble the longer the venture had left to run to completion. However by suspending secondary mortgages that sector is affectively out of bounds leaving those looking for immediate exposure with no choice other than to look at the off plan market.
Mortgages in Dubai
While in some ways the action taken today could be construed as an attempt to curb excessive debt financing in the region, the facts are that mortgage lending compared to the size of the overall market is still very low. There is very little chance of bad debts ballooning to anywhere near the levels we are seeing in western property markets and unless there is another significant shift in the worldwide money markets there seems little immediate risk to the Dubai financial sector.
When you appreciate that very little goes on in Dubai without the knowledge of the authorities it seems inconceivable that they were not party to the move to suspend secondary mortgages. In many areas of the west this would have been seen as a knee jerk reaction but this is a government which is not afraid to act with long term solutions to short term problems. If today’s announcement takes some of the sting out of the market and ensures that the vast majority of ongoing off plan developments are snapped up, then the market will be able to regroup and await a move back to more traditional times.
Whether you agree with the heavy influence the authorities have in areas such as Dubai there can be little doubt that they are more proactive than reactive compared to many governments around the world. While many will sit back and consider each and every aspect of a situation and delay any move until the moment has passed, the Dubai authorities operate in a very different manner.
Ultimately the Dubai leaders are looking to protect Dubai itself but in doing so, and trying to encourage long term sustainable growth, they have in many ways become the property investor’s friend which a few years ago would have been a crazy notion.