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WorldNovember 25 2013

Tougher banking regulation needed for mortgages

Central banks around the world should take note of the United Arab Emirates' new regulations on mortgage lending. 
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With Dubai real estate developers announcing $180bn worth of new projects in the first nine months of 2013 and no shortage of banks lining up to finance them, many industry observers wasted no time in stating that the emirate was heading for another property crash.

House prices in the emirate have jumped more than 20% in the past year, prompting the International Monetary Fund to warn in July that the authorities might need to intervene to prevent another bubble from forming.

With property prices plunging by as much as 50% in the wake of the 2008 crash, much of the United Arab Emirates’ banking sector has spent the past few years nursing billions of dollars of soured loans and restructuring its debts. Had it not been for a $20bn bailout by Abu Dhabi, Dubai would have been brought to its knees.

So the issuance of new regulations by the UAE central bank in late October that will cap home loans at 60% to 80% of a property’s value, along with mortgage lending for pre-construction properties to be capped at 50%, has been met with a huge sigh of relief.

This tightened regulatory approach is something that both the UK and US central banks, and numerous others around the world, will hopefully take on board. The imposition of tougher rules on mortgage lending will be key to preventing new real estate price bubbles, which looks increasingly likely given the strong growth in the housing market coupled with record-low interest rates.

House prices rose nearly 10% in London in the 12 months to July according to official data. There are already calls for the Bank of England to prick the nascent housing bubble by increasing capital requirements on mortgage lending, or through advocating the imposition of more stringent loan-to-value and/or loan-to-income criteria.

Given the sizeable role the property market crashes played in triggering the global financial crisis, countries around the world, quite literally, cannot afford to make the same mistakes again. And nor can the banks afford it for that matter.

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