14 December 2017

Mortgages: Catch me if you can

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An analysis of international real estate markets like the United States reveals that between 20% and 30% of overall transactions continue to occur in cash. This suggests that cash will always play a role in real estate transactions. Whereas, in Dubai, there has been a clear and inexorable rise in the value of mortgage activity over time, rapidly converging to levels seen in the former. The recent increase in mortgage activity can be attributed towards the rise of end users and investors taking advantage of capital structure through leverage. Structurally speaking, the higher levels of mortgage indicate that there will be lower levels of “flipping” and therefore indicate a more stable investor base; this trend is healthy and is expected to accelerate in the years ahead.

The above graph reveals the mortgage activity (mortgages as percentage of overall sales) in both the United States and Dubai. This suggests that cash will always play a role in real estate transactions. Furthermore, in Dubai, there has been a clear and inexorable rise in the value of mortgage activity over time, rapidly converging to levels seen in the US (from less than 30% in 2010 to 61% in November 2017). This attests to the maturity of the real estate space in Dubai, a trend that is expected to continue.

A community-wise analysis of the apartment space reveals that mortgage activity has spiked across all segments of the market. We have witnessed the largest increase in the upper end of the market. In Palm Jumeirah mortgage activity has increased 3x, while in Dubai Marina it has doubled. Mid-income communities such as JVC and Sports City have also experienced sharp increases of 74% and 91%.

In the villa space we have witnessed that mortgage activity in some cases is close to 100% or exceeded the sales amount. This indicates that there is a certain percentage of refinancing happening in the market as owners try to extract liquidity from their units which has built up over the years.

Given the latency in demand and the responsiveness of the banks in terms of giving mortgages, the demand curve appears to be robust, allaying fears of price declines.

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