Mortgages will become more popular among UAE property buyers, particularly end users, in 2024 as interest rates are predicted to fall by as much as 100 basis points.
According to real estate experts, shifts in mortgage rates have a big influence on how prospective buyers approach purchasing real estate in the United Arab Emirates. They point out that many UAE renters may take advantage of this and convert to property buyers in 2024 as a result of the country’s ongoing rental price increase.
Cash buyers account for the great majority of transactions in Dubai, according to ValuStrat. In the third quarter of 2023, there were 8,238 mortgage transactions in the Dubai real estate market, as opposed to 16,485 cash deals (not counting off-plan transactions).
Abu Dhabi, on the other hand, presents a different picture in which mortgage transactions play a bigger role in the real estate market. Abu Dhabi recorded 1,247 mortgage transactions in the same quarter as opposed to 890 cash transactions (accounting for off-plan transactions).
Following eleven rate hikes, the majority of bankers and economists anticipate that the US Federal Reserve will lower rates by 25 to 100 basis points (bps) in 2024. The UAE implements the Fed’s monetary policy because the dirham is dollar-pegged.
SIGNIFICANT IMPACT
Lower rates boost demand and boost home sales, according to Ayman Youssef, managing director of Coldwell Banker, while higher rates can result in decreased affordability and a possible slowdown in the market.
“However the impact of higher interest rates in Dubai was limited because nearly half of the market transactions are comprised of off-plan sales, where investors commonly use the payment plans provided by developers,” he added.
The sales director for Metropolitan Homes’ secondary market, Svetlana Vasilieva, agrees that changes in mortgage rates have a big influence on purchasing real estate in the United Arab Emirates, particularly for individuals looking to move in themselves.
“A predicted, 1 percent decrease in mortgage rates is expected to significantly increase the pool of potential homeowners in the UAE. This affordability boost will attract end users who previously found the market less accessible. However, this decrease could also present an opportunity for investors to borrow at low costs for short-term investments in other potentially high-yield options,” said Vasilieva.
Rachit Pant, CEO of Hedge & Sachs, echoed the opinions of his colleagues when he said that mortgage rates have a big impact on the dynamics of buying a property, affecting demand as well as affordability.
“Elevated mortgage rates correspond directly to monthly payments resulting in a reduction in the affordability of properties. This often prompts buyers to consider smaller or less preferable locations. Additionally, if rates surge, the maximum loan amount for which buyers qualify diminishes. This exclusionary effect can hinder certain buyers, particularly those with lower incomes or smaller down payments,” he said.
ABU DHABI MARKET MAJOR BENEFICIARY
According to ValuStrat analysts, the expected decrease in mortgage rates for 2024 might make more buyers opt for mortgages rather than cash purchases. This is because the reduction in rates might encourage renters to think about moving into homeownership, especially given the current trend of rapidly rising rents in comparison to capital values in Dubai. However, cash transactions are the main feature of Dubai’s real estate market. As such, it is unlikely that the cash-to-mortgage transaction ratio will change significantly, even though the number of mortgage transactions is expected to increase.
“This suggests that interest rates may wield a more significant influence on property transactions in Abu Dhabi compared to the prevalent cash-driven trend in Dubai,” say ValuStrat analysts.
RENTERS, END-USERS MAJOR BENEFICIARIES
ValuStrat analysts say that individuals who are currently renting are likely to consider transitioning to homeownership if there is a reduction in interest rates next year. “This inclination aligns with the ongoing trend of rents increasing at a faster pace than capital values, rendering mortgage alternatives potentially more appealing, especially for properties in the lower and mid-price ranges.”
Svetlana Vasilieva continues, “end users looking for ready-to-move-in properties in the Dh1 million to Dh2.5 million price range” will make up the majority of buyers trying to take advantage of the mortgage rate drop.
She notes that end users are buying properties that are almost ready to be occupied or turned over.
Reduced interest rates, according to Ayman Youssef, make it more advantageous for end users who are thinking about buying a home rather than renting.
“Additionally, for investors, the returns become more attractive, offering the potential for positive leverage. Where investors could cover monthly EMI installments through rental income, enhancing the overall appeal of real estate investment. And improves the overall returns.”
Youssef believes that first-time home buyer with a budget of up to Dh3 million is where most of the activities will be. “We will see an increase in bulk finance for single owners buildings as well,” he added.
TRENDS EMERGING IN THE MORTGAGE MARKET
– Tech-driven Innovation: Online mortgage applications and approvals The mortgage application process has been completely transformed by the introduction of efficient online platforms, which have made it quicker, easier, and required less paperwork overall.
– PropTech and AI-powered Solutions: Technology is changing how buyers look for homes and influencing mortgage decisions. Examples of this technology include virtual reality tours and property valuation bots.
– Blockchain Integration: There is growing interest in utilizing blockchain technology to facilitate safe, transparent mortgage transactions, as it offers increased efficiency and security.
– Sharia-compliant mortgages: In response to the demands of the sizable Muslim community, these loans follow the tenets of Islamic finance and offer moral substitutes for traditional loans.
– First-time buyer programs: With lower down payments and flexible repayment options, these initiatives aim to make it easier for young professionals to enter the real estate market.
– Sustainable Property financing: The availability of eco-friendly loan programs and green mortgages promotes the purchase of energy-efficient real estate and sustainable development.
– Lender and product diversification: Non-traditional lenders, frequently FinTech companies, are making their way into the market with innovative products and competitive rates, upending the dominance of long-standing banks.
Peer-to-peer lending platforms: These are becoming more and more popular, and they have the potential to open up new funding sources by putting borrowers and investors in direct contact.
– Pay Attention to Flexible Repayment Options: More and more adjustable-rate mortgages and longer loan terms are available, giving borrowers more financial flexibility.
– Relaxed visa regulations: Investor residency permits and simplified visa applications are drawing foreign capital, especially in the real estate industry, which is stimulating market activity.
– Real Estate Investment Trusts (REITs): The property market is anticipated to become more transparent and liquid with the introduction of REITs, which may also make it more accessible to ordinary investors.
– Focus on Affordable Housing: The market environment is being shaped by government programs and initiatives designed to offer low- and middle-income earners affordable housing options.