UAE: More property buyers to opt for mortgages as interest rates set to drop in 2024

Property buyers in the UAE, especially end-users, will increasingly opt for mortgages in 2024 as interest rates are expected to drop by up to 100 basis points.

Real estate analysts say that changes in mortgage rates have a significant impact on buyers’ approach when it comes to buying property in the UAE. Amidst the continuous rise in rentals 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 the third quarter of 2023, the Dubai real estate market witnessed 8,238 mortgage transactions compared to 16,485 cash deals (excluding off-plan transactions).

In contrast, Abu Dhabi portrays a different scenario, where mortgage transactions are a more significant factor in the property market. During the same quarter, Abu Dhabi recorded 1,247 mortgage transactions compared to 890 cash transactions (excusing off-plan transactions).

Most bankers and economists expect the US Federal Reserve to reduce rates between 25 to 100 basis points (bps) in 2024 after 11 rate hikes. Since the dirham is pegged to the dollar, the UAE follows the Fed’s monetary policy.

Significant impact

Ayman Youssef, managing director, Coldwell Banker, said lower rates stimulate demand and increase home sales, while higher rates can lead to reduced affordability and a potential slowdown in the market.

“However the impact of higher interest rates in Dubai was limited due to the fact that nearly half of the market transactions are comprised of off-plan sales, where investors commonly use the payment plans provided by developers,” he added.

Svetlana Vasilieva, sales director for secondary market, Metropolitan Homes, acknowledges that mortgage rate changes have a significant impact on buying properties in UAE, especially for those who are buying for themselves to move in.

“A predicted, 1 per cent decrease in mortgage rates is expected to significantly increase the pool of potential homeowners in the UAE. This affordability boost will attract end users who previously found the market less accessible. However, this decrease could also present an opportunity for investors to borrow at low costs for short-term investments in other potentially high-yield options,” said Vasilieva.

Echoing his peers’ views, Rachit Pant, CEO, Hedge & Sachs, added that mortgage rates hold a significant influence over property acquisition dynamics, impacting both affordability and demand.

“Elevated mortgage rates correspond directly to monthly payments resulting in a reduction in the affordability of properties. This often prompts buyers to consider smaller or less preferable locations. Additionally, if rates surge, the maximum loan amount for which buyers qualify diminishes. This exclusionary effect can hinder certain buyers, particularly those with lower incomes or smaller down payments,” he said.

Abu Dhabi market major beneficiary

ValuStrat analysts say that the anticipated reduction in mortgage rates for 2024 may lead to a higher number of buyers choosing mortgages over cash purchases, especially as this reduction could potentially prompt renters to consider transitioning to homeownership, particularly in light of the prevailing trend of rapidly increasing rents compared to capital values in Dubai. However, the real estate landscape in Dubai is predominantly characterised by cash transactions. Consequently, while the volume of mortgage transactions is likely to rise, a significant shift in the cash-to-mortgage transaction ratio is improbable.

“This suggests that interest rates may wield a more significant influence on property transactions in Abu Dhabi compared to the prevalent cash-driven trend in Dubai,” say ValuStrat analysts.

Renters, end-users major beneficiaries

ValuStrat analysts say that individuals who are currently renting are likely to consider transitioning to homeownership if there is a reduction in interest rates next year. “This inclination aligns with the ongoing trend of rents increasing at a faster pace than capital values, rendering mortgage alternatives potentially more appealing, especially for properties in the lower and mid-price ranges.”

Svetlana Vasilieva adds that the majority of buyers who will try to cash in on the drop in mortgages will be end-users looking for ready-to-move-in properties in the price range of Dh1 million to Dh2.5 million.

She points out that end-users are purchasing properties that are nearly ready to be handed over or ready to move into.

Ayman Youssef noted that lower interest rates create a more favourable scenario for end users contemplating homeownership rather than renting.

“Additionally, for investors, the returns become more attractive, offering the potential for positive leverage. Where investors could cover monthly EMI instalments through rental income, enhancing the overall appeal of real estate investment. And improves the overall returns.”

Youssef believes that first-time home buyer with a budget of up to Dh3 million is where most of the activities will be. “We will see an increase in bulk finance for single owners buildings as well,” he added.

Trends emerging in the mortgage market

- Tech-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.

- PropTech and AI-powered Solutions: Technology, including property valuation bots and virtual reality tours, is reshaping how buyers search for homes, influencing mortgage decisions.