Someone else’s crisis – but still our problem

source The National

If you are in the market for a mortgage, things are not looking that good these days. Banks are already tightening their terms of lending: much higher down payments are now expected, greater scrutiny is taken of financial records, and interest rates as high as 9.5 per cent imposed. The country’s largest home lender, Amlak, has even announced a freeze on new home loan applications and there are fears that other lenders could soon be following its example.

This contraction of domestic credit is a direct consequence of the global financial crisis. With liquidity restricted on the international monetary markets, financial institutions everywhere find it increasingly difficult to balance their books, let alone finance even the most common economic transactions. So they become risk averse where they were once risk taking, perhaps too much so.

Here in the UAE, capital flight in recent months has adversely impacted the banks’ ability to provide loans. When deposits dropped as a consequence of the panic that shook the international markets, the Central Bank wisely intervened by injecting capital into banks to help them maintain a healthy loan-to-deposit ratio. But even this has not been sufficient to restore the banks’ full lending power.

The real estate sector has been particularly badly hit by the rush to convert assets into liquidity. This has driven prices down at landmark development projects in Dubai and elsewhere in the country. Ominously, prices at Dubai’s Palm Jumeirah have declined by 40 per cent since September. Elsewhere, too, the secondary market is suffering.

With such a troubled picture, it is no wonder that loans are harder to come by. Mortgage lenders and banks are increasingly concerned about their portfolios, fearing that their existing clients could default on their loans if the value of their properties continues to drop to the point where they are worth less than the money owed. With the spectre of negative equity hanging over everyone’s heads, it is little wonder that the lenders have little appetite to offer more mortgages while they struggle to get access to funding on international markets and reduce their own exposure.

The fear is that a vicious cycle will emerge, whereby falling prices deter lenders from lending, which, with an ever-shrinking base of buyers, drives real estate prices further down. And this crisis is penalising not just the speculator who bought and flipped properties for quick gains, and now has to minimise his losses, but more worryingly the average home buyer who needs a place for his family, but whose salary – no matter how generous – and financial record no longer suffice to secure a multi-year loan.

The economy of our nation can resist a momentary real estate downturn and wait for better days. The fundamentals of UAE growth remain strong, and the Central Bank has enough liquidity to keep banks in business. But the issue is elsewhere. The UAE must be able to assure its residents, both nationals and expatriates, that access to basic consumer goods and housing will not be made difficult for people in good standing.

Already measures by the Central Bank and other authorities have been taken. Cash has been injected into local banks and will hopefully trickle down to home buyers. There are discussions about new financial vehicles to support struggling lenders. The next essential task is to communicate to the larger public that their living needs are being seriously attended to.