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Mortgage Market
One of the leading factors in Dubai’s real estate downturn has been the absence of available mortgage products. With credit slowly easing after its freeze this past winter, are home loans now more obtainable? Independent Finance’s Chris Green discusses the current state of the industry.
Most crucially, banks lend relative to their expectations of repayment. By how much have defaults on home mortgages gone up in the second quarter of this year in the UAE?
The true default rate in the UAE will only be known be when the Central Bank has correlated all of the data from the financials of each mortgage lender in the UAE and attempted to get a clear, aggregated picture. However, we know mortgage performance has deteriorated in the second quarter and will likely worsen still before getting better.
Banks have been under stress and have tightened lending standards to shore up their capital base, but fortunately we are now seeing easing up of interest rates, which in turn helps current mortgage clients more easily make their payments.
We need to observe international trends and perhaps calculate from such observation where we are and what we can expect to see. I have no doubt that we have seen at least a few percent increase in home mortgage defaulting over the past 6 months. We will see more than 5% of mortgaged homeowners being more than 30 days late on their mortgage payments and this will have increased by more than 25% from the levels last year. That is a normal worldwide trend, however.
Interestingly, the handling of these increased liabilities has produced very innovative ideas from banks in terms of restructuring client deals, holiday payment plans and one-on-one talks with such clients. We need to remember that lenders, besides being compassionate and helping those that are currently looking for finance in any form, also have good reason to be wary. Bank credit card and personal loans delinquency is at its highest level in the past two years. The positive sign is that with lenders requiring larger deposits from clients, we are seeing a more controlled and managed lending trend where credit risk criteria and the management thereof is improving daily. Leverage is reducing, which is clearly good for the fundamental soundness of the industry.
What do you predict after the summer - do you see defaults continuing up or do you think stabilisation will return to the market?
The advantage that the UAE has right now is that we have been through the “switch off the lights phase” in quarter one, and the “tightening of lending and increased deposit phase” in quarter two. Sincere backing by the UAE Central Bank for the banking sector has mitigated uncertainty throughout this period. School holidays and what many people believe to be the “Last Great Trek” from Dubai will are the remaining variables to watch. This experience will give observers the clearest view thus far of the financial sector trajectory in the UAE; where the mortgage market stands; what defaults have actually occurred and which are just hiccups in the payment process.
For the first time, lenders will have had a full year of very tough and trying times in managing the market, through which personally I feel they have done an excellent job. I know many people will not agree with this statement, but if you are here for the long haul, then you can clearly see why banking has had to make the difficult choices of retracting easy credit. Will the industry stabilize? The answer is definitely yes. When? If you look at the message and the action behind many banks, it is already happening. I believe we will have a stable 4th quarter in comparison to 2008 and we will start working as a normalised market thereafter.
Chris Green is Managing Director of Independent Finance, and industry-leading UAE mortgage consultancy.
