No reason for IMF to worry about UAE mortgage lending

House prices in Britain are exposed to a severe slump thanks to the runaway scale of the property boom of the past decade, said the IMF last week, concluding that at least 30% of these increases cannot be justified by fundamental factors like demand for housing or salary levels.

The IMF named the UK, Ireland, France and the Netherlands as the countries most vulnerable to nasty correction in house prices. This follows the house price slumps seen over the past year in the US and Spain.

In its analysis, the IMF says that much easier access to mortgage finance in developed economies like the UK has fuelled a house price boom beyond levels considered to be sustainable in the long term.

And the fund criticises the Bank of England for not using interest rate policy to keep house prices under control. The risk now is that a deflation in house prices will impact severly on consumer spending and the rest of the economy.

Another planet

How far away from the UK is the situation in the UAE today? It could almost be another planet with mortgage lending still in its infancy.

As a recent report from Kuwait based Global Investment House pointed out, mortgage loans remain very low for an economy the size of the UAE at Dhs50.1bn, although up from Dhs31bn in 2006 and Dhs17.2bn in 2005.

Undoubtedly developers must currently have a much larger exposure to loans, and there is money from personal lending in the real estate market. But this is not such an important driver for house prices as mortgage finance.

Over the next few years the 23 local mortgage providers are all gearing up for a huge increase in their retail mortgage lending. So if you want to draw a parallel with the developing world and its housing boom then you need to go back to a much earlier period when lending levels were far lower.

Boom to come

The clear implication is that the UAE still has its mortgage and house price boom to come. If what the IMF is saying is right and the availability of home finance is what drives prices upwards then we just have not seen this phenomenon in the emirates yet.

Moreover, the recent decline in US interest rates has yet to be fully reflected in the mortgage products available to UAE consumers, although with the dollar-peg in place this should follow.

Lower interest rates mean that landlords can make a profit on lower rental yields and so will pay higher prices for property. That is rental yield compression. And it will not be until rental yields in Abu Dhabi and Dubai fall to levels seen in the developed economies today that alarm bells should start ringing about local house prices.