Do GCC real estate prices have to fall further to make home finance work?

Posted on 02 June 2010 with 1 comment from readers

The youthful GCC mortgage sector is presently being held back by asking prices that simply make it too expensive for most would-be mortgage customers to own a home. Therefore, GCC house prices will have to fall even further if the local mortgage industry is to begin to finance the real estate sector properly, or so 120 delegates to the inaugural GCC Mortgage Summit 2010 heard in Bahrain today.

Central Bank of Bahrain Executive Director of Banking Supervision, Khalid Hamad said: ‘Current prices are not affordable or realistic, and further falls are necessary and then economic fundamentals will start rebuilding market confidence.

‘The fundamentals of the region are good, underpinned by growing global demand for oil. But since 2005 real estate prices have become inflated and bubbles have formed. Particularly in commercial real estate demand is weak and prices are unrealistically high. And for residential property the demand is in the low and middle income segment while the supply is in the luxury market’.

Bahrain real estate

Ernst & Young’s Head of the Islamic Financial Services Group, Sameer Abdi pointed out that 80 per cent of Bahrain nationals earn less than BD1,200 per month, and with local mortgages at 9.25 per cent there is no way for this group to pay a large mortgage.

He said mortgage rates would need to fall to around three per cent for Bahraini nationals to afford to buy a villa, or house prices would have to come down.

This challenge to mortgage providers was taken up by the CEO of Sakana, co-organizers of the new annual event, R. Lakshmanan who noted the large role of expatriates in some GCC property markets, particularly the UAE.

But he focused on the creation of a $66 billion mortgage market in the region since the first freehold sales in Dubai in 2001: ‘This industry is still in its infancy and a baby, and for the past two years has been coping with the impact of the global financial crisis and 25 to 50 per cent house price falls.’

How much lower do prices have to go to become affordable to those who need a mortgage? Clearly if mortgage rates were closer to the UK level of 4.5 per cent than 6.5 per cent and more in Dubai then the necessary adjustment would be less.

Crisis of confidence

It is undoubtedly also true that mortgage finance is not the only reason that buyers are not buying. After a crash like the one that followed the global financial crisis it is only natural that buyer confidence should be shattered, and probably for some years.

Besides it is unrealistic to lump the whole GCC together for mortgages. These are very different markets. The expatriate dominated UAE is much wealthier than Bahrain, for example, and can afford higher prices.

But should world financial events, and over supply for Dubai, conspire to drive house prices lower that will be an enormous opportunity for the mortgage business. The total of $66 billion loaned since 2001 is a drop in the ocean for a business that is the biggest earner for banks in many advanced economies.

The GCC mortgage business will grow apace whatever happens over the next few years, and its future is perhaps a reason to believe that some local banking stocks are undervalued on business fundamentals.