What is the outlook for Dubai mortgages?

Not yet at its third anniversary but the freehold Dubai property market has already spawned an active mortgage market with more than half a dozen players offering both fixed and variable rate products.

However, in the near future more banks are likely to enter the mortgage arena - after all this is where many banks make their money around the world. What is holding back the ilk of Emirates Bank Group and Standard Chartered Bank is the legal position in Dubai.

Once the law is clarified - and Emaar has openly said a Dubai law is highly probable in 2005 - the number of banks entering the mortgage market will increase. And greater competition should mean lower interest rates.

At present the standard monthly variable interest rate is 6.5% which compares to 4.1% in the USA. As the UAE's dirham is linked to the US dollar interest rates are closely pegged as well, and the current gap leaves some room to improve local mortgage rates.

Banks justify the higher figure today by citing the low volume of transactions - which is true enough, though becoming less of a factor day-by-day as the Dubai property market grows. Thus even if US interest rates move up by 1% this year, as many predict, Dubai mortgage rates should stay unchanged, or even fall, due to greater competition.

Alongside the maintenance of attractive short-term interest rates the cost of long-term Dubai fixed rate mortgages should also fall. At present these are high in relation to US Treasury Bond yields - and again there is room for a tightening of rates.

Now the availability and cost of funds is one of the crucial determinants of price levels in any property market. Therefore, it does not need much imagination to see that more lenders and lower, or at worst stable, interest rates will be good for the value of Dubai property.

Part of the reason for the gap between Dubai property prices, and say Singapore, is that the financing of property is less developed in Dubai. Once this factor is eliminated then there is little justification for such lower prices.

Indeed, it is interesting to note that rents are pretty much the same in the two cities, while property values are lower in Dubai. Given the free movement of capital and foreign ownership this gap should be closed quite quickly.