These and other questions were asked by Dr. Mahdi Al Aswad, Managing Director of Halcon Rea l Estate. He also tried to answer them by analyzing the current situation in the UAE real estate market
Should loan interest rates really be so high?
The interest on loans established by central banks has a certain impact on the housing market. When lending rates go down, home prices invariably go up and vice versa.
But what to do with the interest rates set by institutions providing mortgage financing? What influence do they have on the real estate market in the country? This question is worth being asked in a market like the UAE, where the dirham is pegged to the dollar and loan rates remain at 9-10%. After all, then the scenario "If interest rates fall, then housing prices will increase and vice versa" does not work.
Loans are too expensive
The explanation of why interest rates on loans in the UAE are high is quite simple - interest rates in dirhams are higher than bank interest in dollars. The reasons why loan rates are high are much more complex and not so easy to understand.
You must ask yourself why banks charge you 9.5% when the dirham has been artificially maintained against the dollar for many years. This is not the main interest rate of banks, which we are talking about, but the additional two to three percent that banks add "from above" to their products. Why can't it be 1.5%? Getting a dollar loan means a 5.5% interest rate line, and a loan in dirhams costs you 9.5%. This is nonsense.
In developed markets, lenders are usually criticized for negligence regarding housing lending standards. Here we can criticize in the opposite direction. Banks say they should keep their risks in mind when providing housing loans in an emerging market.
I agree that the real estate market of the Emirates is not as established as, for example, European or American, but there are elements of risk in all markets, regardless of their degree of development. And, of course, the risks can’t double the numbers, as it happens here. A little more time will pass, and all the consequences of this will become obvious.
Negative impact
When we talk about rent, from the point of view of restrictions on the upper limit of its cost and control over the lease, we see that this issue is of concern to many.
Control over the growth of rental prices, no doubt, affects the owners (investors) of housing, who lease their property to tenants. Due to the high bank interest on loans, investors find themselves between a rock and a hard place. At the moment, homeowners are not allowed to increase annual rents by more than 7%, but banks continue to charge 9.5% on loans taken. Well, and how should you be interested in providing the market with such a product as housing, making a profit of 7% per year, while paying the bank 9.5%? The minus is 2.5%, which is not very attractive to investors and potential home buyers.
Real estate markets usually develop due to the presence of two factors: supply / demand and financing. In the UAE, supply / demand issues are discussed very often and everywhere. Unfortunately, the importance of having a factor such as mortgage financing and associated costs is usually discounted.
However, housing loans today are a more important issue supporting the market than ever, since a huge amount of real estate is approaching the stage of completion and commissioning. In the end, people should be able to buy real estate at affordable prices, and the value of money in this case becomes a key factor showing whether they can afford it or not.
What to do?
It seems to me that today we are in a situation in which moving forward means for banks a review of their high interest rates on mortgage lending. How can we balance between the pinned "ceiling" of increasing rents and paying their interest on loans to banks? How can we overcome these high interest rates?
One way is to encourage investors and promoters to finance projects and purchase real estate on their own, leaving banks “overboard”. The problem here is that this will drastically limit market development. And when the real estate market is such as in the UAE, where everyone should be busy and interested, there is a risk of stagnation.
Based on my experience, I’ll say that there are many people who come to us and buy real estate, and when we tell them that they can get 75-80% of the financing, they are simply happy. But then a bank comes into action that shockes them with its interest rates. Many buyers are familiar with lending rates in London or the USA, and this, without a doubt, stops them from making a purchase in the Emirates. They should already think twice before deciding to buy a property here.
Future
My point is that the high rates on local loans in the UAE today leave room for lower prices, which are worth following, and this new real estate market will move to its maturity and there will be plenty of room for healthy competition. Let's follow the development of events.
