For now, it does not seem that the growth-hungry emirate has the will to act more aggressively. The history of the mortgage loan caps suggests it may not; the central bank watered down stricter curbs after complaints by commercial banks.
In a statement on June 9, the Land Department insisted that the property market was broadly healthy, and that rising prices were simply due to a strong economy.
In an annual stability report a week ago, the UAE central bank warned that the real estate market might be overheating. But it is unclear what further action it could take; with U.S. interest rates still ultra-low, any rate hike in the UAE is unlikely given the UAE dirham’s peg to the U.S. dollar.
The supply side of the equation looks equally uncertain. Plans for real estate projects worth well over $50 billion have been announced in Dubai over the past 18 months – but it is unclear how many will actually get built and how fast.
Major work is starting on some of them. After shrinking for 16 months in a row, construction loans in the UAE jumped 40.1 percent from a year earlier in December to 181 billion dirhams, the fastest rate since June 2009, latest central bank data show.
That far outpaced growth in total bank loans, which rose just 8.8 percent in December to 1.1 trillion dirhams. And the lending boom is probably just beginning.
“We foresee an acceleration of real estate lending as developers launch new projects, and more local and expatriate customers seek to enter the mortgage market,” credit rating agency Standard & Poor’s said in a report last month.
A Dubai banker, declining to be named under briefing rules, noted increased risk-taking in funding to developers by local banks: “Some banks are offering 100 percent financing deals to firms on a selective basis. That’s not very sustainable.”
A return to the full excesses of the pre-2008 boom still looks unlikely. The crash cleared some second-tier developers out of the market, and the companies that remain still bear the balance sheet scars of the last crash; this should encourage at least some of them to be more cautious.
There are signs that developers are paying more attention to their rivals’ plans and implementing projects only in stages, proceeding with each one after reevaluating the demand outlook.
“Supply is more coordinated” than it was in the past, said Fahd Iqbal, head of Middle East research at Credit Suisse.
Nevertheless, the risks may be substantial in the next few years. Any sudden loss of confidence by a large proportion of foreign investors, or sharp tightening in U.S. monetary policy, could ignite a pull-back in the market, S&P said in its report.
“What happened in 2013 was unsustainable. It is a big question mark whether or not we are going to have a sustained leveling off or whether it is going to pick up again,” said Farouk Soussa, Citigroup’s chief economist for the region.
“In Dubai things change quickly. If they build…all these big projects…then I think we can start to get more concerned about another massive cycle in the property sector that might be unsustainable.” (Reuters)