Mortgage costs will rise, but not immediately

Mortgage costs in the UAE will increase after the US Fed’s rate rise and are forecast for further rises next year. But that is unlikley to deter a recovery next year in property prices, particularly in Dubai.

The US Federal Open Market Committee decision to raise rates for the the second time in a decade sent the US dollar – to which the UAE dirham is pegged – to a 14-year high against the euro.

With the UAE Central Bank historically mirroring US Fed policy, the move makes a rate rise for UAE banks a near certainty.

“The 0.25 per cent hike in the US may not force UAE banks to immediately pass on the costs in their mortgage exposures. But there will soon come a tipping point and that lenders need to be aware of,” said Jo Phillips, the general manager of the Holborn Assets’ mortgage division.

“A quarter of a percentage point rise is unlikely to make a big impact in monthly payments. However, if the Fed keeps raising rates next year, then the repayments will make a bigger impact.”

Mortgage brokers estimate that for a modest mortgage of Dh1 million paying the current average rate of 3.25 per cent, monthly capital repayments will increase by Dh133 a month to Dh5,006 from Dh4,873.

With further rate hikes slated for next year, monthly payments could increase more significantly.

“Banks have become very competitive with fixed rates in the last couple of years, the average fixed rate is for two years and is sometimes less expensive than the variable rates on offer,” she said.

Meanwhile, property stocks on the main Dubai bourse were hit yesterday as investors worried that the interest rate hike would affect developers such as Emaar Properties and Damac.

“We are likely to see this kind of knee-jerk reaction for a couple of days, but in the medium term we are positive about stocks such as Emaar and Damac,” said Sanyalak Manibhandu, the head of research at NBAD Securities. “This rate hike was widely expected and we expect Dubai property to benefit next year from an increase in infrastructure spending ahead of the Expo.”

Property brokers too said that the rate decision was unlikely to affect their predictions that house prices in Dubai would start to rise by the end of next year.

“The recovery in the UAE’s property markets is very much hinged on the looming World Expo and the urge in infrastructure spending associated with the event,” said Faisal Durrani, the head of research at property broker Cluttons. “While higher base rates may pose some challenges for mortgaged households, it is unlikely to impact the fundamental turn-around in residential requirement levels, particularly in Dubai, as we race towards the 2020 mega event.”

Property brokers expect house prices and rents to rise at various points next year as the emirate’s economy recovers and construction jobs are created to build Expo 2020 infrastructure.

“An interest rate hike was already priced into our assumptions. Rises in interest rates are never a good thing for property markets and the strong dollar will be a headwind for the recovery of the UAE property market,” said Craig Plumb, the head of research for property broker JLL’s Dubai office. “However, the fact that the Fed has been able to raise interest rates shows that the economy is faring better and we still expect Dubai property prices to end next year higher than they started.”

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