Property buyers in the UAE, especially end-users, will increasingly opt for mortgages in 2024 as interest rates are expected to fall by up to 100 basis points.
Property analysts say changes in mortgage rates have a significant impact on buyers’ approach when it comes to purchasing property in the UAE. Amid the continued rise in rents in the UAE, they note that many renters in the UAE could take advantage of this and switch to property buyers in 2024.
According to ValuStrat, cash buyers make up the vast majority of transactions in Dubai. In Q3 2023, the Dubai real estate market witnessed 8,238 mortgage transactions compared to 16,485 cash transactions (excluding off-plan transactions).
Instead, Abu Dhabi presents a different scenario, where mortgage transactions are a more important factor in the real estate market. During the same quarter, Abu Dhabi recorded 1,247 mortgage transactions compared to 890 cash transactions (excluding off-plan transactions).
Most bankers and economists expect the US Federal Reserve to cut rates by 25 to 100 basis points (bps) in 2024 after 11 rate increases. Since the dirham is pegged to the dollar, the UAE follows the monetary policy of the Federal Reserve.
Ayman Youssef, CEO of Coldwell Banker, said lower rates spur demand and increase home sales, while higher rates can lead to lower affordability and a potential market slowdown.
“However, the impact of higher interest rates in Dubai was limited due to the fact that almost half of the market’s transactions are made up of off-plan sales, where investors often use payment plans provided by developers “he added.
Svetlana Vasilieva, secondary market sales director at Metropolitan Homes, acknowledges that changes in mortgage rates have a significant impact on property purchases in the UAE, especially for those buying to move themselves.
“A projected 1 percent decline in mortgage rates is expected to significantly increase the pool of potential homeowners in the UAE. This increase in affordability will attract end users who previously found the market less accessible. However, this decline could also represent an opportunity for investors to obtain low-cost loans for short-term investments in other potentially high-return options,” Vasilieva said.
Echoing the views of his peers, Rachit Pant, CEO of Hedge & Sachs, added that mortgage rates have a significant influence on property acquisition dynamics, affecting both affordability and demand.
“High mortgage rates correspond directly to monthly payments, resulting in a reduction in property affordability. This often leads buyers to consider smaller or less preferable locations. Additionally, if rates increase, the maximum loan amount buyers qualify for decreases. “This crowding out effect can hinder certain buyers, particularly those with lower incomes or lower down payments,” he said.
The main beneficiary of the Abu Dhabi market
ValuStrat analysts say the anticipated reduction in mortgage rates by 2024 may lead more buyers to choose mortgages over cash purchases, especially as this reduction could prompt renters to consider transitioning to homeownership. housing, particularly in light of the prevailing trend of rapid increase. rentals compared to capital values in Dubai. However, the real estate landscape in Dubai is predominantly characterized by cash transactions. Consequently, while the volume of mortgage transactions is likely to increase, there is unlikely to be a significant change in the ratio of cash to mortgage transactions.
“This suggests that interest rates may exert a more significant influence on real estate transactions in Abu Dhabi compared to the prevailing cash-driven trend in Dubai,” ValuStrat analysts say.
Tenants, end users, main beneficiaries
ValuStrat analysts say people who currently rent will likely consider the transition to homeownership if there is a reduction in interest rates next year. “This inclination aligns with the current trend of rents increasing at a faster rate than capital values, making mortgage alternatives potentially more attractive, especially for properties in the low and mid-price ranges.”
Svetlana Vasilieva adds that most of the buyers who will try to take advantage of the decline in mortgages will be end users looking for ready-to-move-in properties in the price range of 1 million to 2.5 million dirhams.
He notes that end users are purchasing properties that are almost ready to be delivered or ready to move into.
Ayman Youssef noted that lower interest rates create a more favorable scenario for end-users considering homeownership rather than renting.
“In addition, for investors, returns become more attractive and offer potential for positive leverage. Where investors could meet the monthly EMI installments through rental income, improving the overall attractiveness of real estate investment. And it improves overall performance.”
Youssef believes that most of the activities will target first-time homebuyers with a budget of up to Dh3 million. “We will also see an increase in crowdfunding for single-owner buildings,” he added.
Emerging trends in the mortgage market
– Technology-driven innovation: Online Mortgage Applications and Approvals: The advent of streamlined online platforms has revolutionized the mortgage application process, making it faster and more convenient, reducing paperwork.
– Solutions powered by PropTech and AI: Technology, including property valuation robots and virtual reality tours, is reshaping the way buyers search for homes, influencing mortgage decisions.
– Blockchain integration: Exploring the potential of blockchain for secure and transparent mortgage transactions is gaining ground, promising greater security and efficiency.
– Sharia-compliant mortgages: Responding to the needs of the large Muslim population, Sharia-compliant mortgages adhere to Islamic financial principles and offer ethical alternatives to conventional loans.
– Programs for first-time buyers: Initiatives are emerging to make it easier for young professionals to enter the real estate market, with lower down payments and flexible payment options.
– Sustainable Real Estate Financing: The introduction of green mortgages and green loan options encourages investment in energy-efficient housing and sustainable development.
– Diversification of lenders and products: Non-traditional lenders, often fintech companies, are entering the market offering competitive rates and innovative products, challenging the dominance of established banks.
– Peer-to-peer lending platforms: Platforms that connect borrowers directly with investors are gaining popularity, potentially opening up new avenues for financing.
– Focus on flexible payment options: The availability of adjustable rate mortgages and longer loan terms is becoming more common, giving borrowers greater flexibility in managing their finances.
– Relaxed visa regulations: Simplified visa and residence permit processes for investors are attracting foreign investment, particularly in the real estate sector, boosting market activity.
– Real Estate Investment Trusts (REITs): The introduction of REITs is expected to improve liquidity and transparency in the real estate market, potentially making it more accessible to retail investors.
– Focus on affordable housing: Government programs and initiatives aimed at providing affordable housing options for low- and middle-income people are shaping the market landscape.
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