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First ever Dubai mortgage foreclosures, what next?

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Barclays Bank has won the first foreclosure case in the history of Dubai, according to an exclusive report on Bloomberg today, leaving the floodgates open for more foreclosures in the emirate where prices have fallen by 50 per cent over the past year.

Last September Moody’s forecast that 12 per cent of the 27,000 residential mortgages in the emirate would default within 12-18 months, or more than 3,000 homeowners. The largest mortgage provider Tamweel also has several foreclosures pending in the courts.

Market maturity

And while bankers hail these foreclosures as a sign of the growing maturity of the lending market in Dubai – something that will encourage more lenders into the market in the future – the immediate impact on the market is likely to be a further shake-down in prices.

For as in the rest of the world banks that foreclose on home loans will tend to dump these properties at a discount to get their money back. Such foreclosure auctions could depress the whole market.

Given that Deutsche Bank forecasts that 30,000 units are to be delivered in this year – causing a probable oversupply in the market place – then the impact of foreclosure sales on selling prices could be considerable.

What is more difficult to predict is the likely demand for such property at auction. If repossessions are in relatively limited supply they will have little impact on secondhand property prices. If there is really a flood of them prices could tumble again.

Price support

But ironically the very fact that mortgage repossessions are now happening in Dubai can also be seen as a strength for the future. International and local banks that had kept the supply of Dubai mortgages under tight control are going to be more willing to grant mortgages with the assurance of repossession.

And in the long run it is the availability of home finance that drives most global housing markets. Thus far Dubai has been unusual in being mainly a cash market, and as that changes the positive impact on house prices will be considerable.

Buying a Dubai repossession in a foreclosure auction ought therefore to prove a very good buy in the longer term.

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Written by Peter Cooper

January 11, 2010 at 5:24 pm

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