'This is 100 per cent not going to help the Dubai property recovery'

Property buyers in the UAE will end up paying more for their purchases as a rise in US interest rates threatens to delay a housing market rebound.

The Central Bank of the UAE swiftly raised its interest rates because of its currency peg with the US dollar after the move by the Fed to hike interest rates by 0.25 per cent late on Wednesday.

It could drive up monthly payments by as much as Dh500 a month on a mid-range villa in Dubai.

Although the increased costs are unlikely to force many property owners into the red, it comes as UAE residents are becoming increasingly squeezed by spiralling costs and await the introduction of VAT next year.

Local property brokers also predict that the rate hike, which could be followed by two more later this year, is likely to add to the growing headwinds holding back a property recovery.

“Increasing interest rates will dissuade renters from shifting into the ownership sector, extending the period that prices bobble along the bottom, before increasing again from their current low point,” said Craig Plumb, the head of research at JLL’s Dubai office.

According to the Dubai Land Department, 6,300 mortgages were granted for the purchase of existing properties in 2016, representing 34 per cent of the total number of sales, compared with 3,600 mortgages in 2011, equating to 17 per cent of sales.

“The interest rate rise is 100 per cent not going to help the Dubai property recovery,” said Matthew Green, the head of research for CBRE’s Dubai office. “On its own the quarter of a percentage point rise is not so significant but it adds to a number of local market fundamentals which are acting to depress the housing market in Dubai.”

Analysts also predict that rising US interest rates are likely to push up the value of the US dollar against other currencies. This could be particularly problematic for Dubai real estate, which is highly reliant on sales to overseas purchasers.

“The strength of the US dollar is currently the biggest barrier to people entering the Dubai market and this rise is likely to raise that barrier further,” Mr Green said.

Brokers also predict that the rise in interest rates will also affect off-plan payment plans.

These quasi-mortgages are often offered by property developers trying to sell off-plan property in the UAE. They usually require buyers to put down very small down-payments while a property is being constructed with the bulk of payment only due at completion.

“Developers of off-plan properties have responded to the previous period of market weakness by offering more attractive payment terms to attract those currently renting to buy there home,” said Mr Plumb. “These payment plans are effectively mortgages offered by developers rather than the banks. The terms of such plans are likely to be revised if interest rates continue to increase over a prolonged period of time.”


Follow The National’s Business section on Twitter