UAE: Mortgages to be used by more home purchasers as interest rates fall in 2024

Real estate analysts predict that property buyers, particularly end-users, in the UAE, will increasingly turn to mortgages in 2024, as interest rates are projected to drop by as much as 100 basis points. According to real estate analysts, mortgage rates have a major influence on buyers’ decision-making process when it comes to purchasing properties in the UAE. As rentals in the UAE continue to grow at a rapid pace, they predict that many UAE renters will opt to become property buyers in 2024.

In Dubai, cash buyers account for the majority of transactions. In Q3 2023, mortgage transactions accounted for 8,238 deals, while cash deals accounted for 16,485 deals (except off-plan deals). On the other hand, in Abu Dhabi, mortgage transactions account for 1,247 deals, while cash transactions account for 890 deals, except off-plan deals. The US Federal Reserve is expected to lower rates by 25-100 basis points in 2024, after hiking them 11 times in a row, according to bankers and economists. The UAE’s currency, the dirham, is dollar-denominated, so it follows the Fed’s monetary policy. 

Lower rates will stimulate demand and drive home sales, whereas higher rates can reduce affordability and potentially slow down the market. In Dubai, higher interest rates have had a limited impact on the market, as almost half of all market transactions are off-plan, where investors typically take advantage of the payment plans offered by developers. At Metropolitan Homes, we understand that changes in mortgage rates can have a significant effect on the buying process in UAE, particularly for those looking to buy for themselves and move in. We believe that a projected 1 percent reduction in mortgage rates will significantly expand the pool of prospective homeowners in the country. This affordability reduction will draw in end users who may have found the market to be less accessible in the past. However, it could also provide investors with the chance to borrow at lower costs for short-term investments in other potential high-return opportunities.

Mortgage rates have a direct impact on property acquisition dynamics, affecting affordability and demand. Higher mortgage rates translate directly into higher monthly payments, making properties less affordable. This often pushes buyers towards smaller or less desirable locations. Furthermore, if rates increase, the maximum amount for which buyers can qualify decreases. This exclusionary impact can prevent some buyers, especially those with lower incomes and smaller down payments.

Mortgage rates are expected to go down in 2024, which could encourage more buyers to choose mortgages over cash purchases. This could also encourage renters to switch to homeownership, especially as rents are rising faster than capital values. However, the real estate market in Dubai is mainly made up of cash transactions. Therefore, while mortgage transactions are expected to increase, a significant change in the cash-to-mortgage ratio is unlikely. This implies that interest rates may have a greater impact on property transactions in Dubai than in Abu Dhabi.

If interest rates go down next year, people who are renting are likely to think about moving into homeownership. This trend is consistent with the fact that rents are growing at a faster rate than capital values, making mortgage alternatives more attractive, particularly for properties in the low and mid-range. Most buyers who will attempt to capitalize on the decline in mortgages will be buyers who are looking for ready-move-in homes in the Dh1 million-$2.5 million price range.

End-users are buying properties that are almost ready to be sold or moved into. With lower interest rates, this is a more attractive situation for those considering homeownership instead of renting. Most of the activity will be for first-time home buyers with a budget of Dh3 million or less. Bulk finance for single-owner buildings will also increase. Investors will also find the returns more attractive, as they can take advantage of positive leverage. Investors can cover monthly EMI payments with rental income, making real estate investment more attractive and improving overall returns.

Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. PropertyPistol does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.

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