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Negative equity and mortgage defaults creeping into Dubai property market

High interest rates, banks tightening credit and falling real estate prices have hit buyers of off-plan property hard as the market cools in the face of dwindling demand due to the global financial crisis.

'The problems of negative equity and mortgage default are now realities in Dubai,' said Matthew Hooton, head of real estate in the Middle East for law firm Ashurst.

Speculators who bought off plan, property yet to be completed, during Dubai's real estate boom are now faced with spiralling mortgage costs as lenders grow increasingly fearful over customers defaulting on payments.

Official figures from HSBC bank published earlier this month showed that the price of top-end apartments fell by as much as 30% in Dubai's downtown DIFC district during October.

There is concern that if growing numbers of homeowners fall into negative equity, there will be a rush to sell real estate.

'There is a danger of getting into a double whammy of high interest rates making mortgages unaffordable and dropping house prices,' said Chris Dommett, CEO of mortgage broker John Charcoal's Dubai office.

'That would be exacerbated here because most of the population are not from here. The incentive to cut and run is greater. If somebody can't afford to repay their mortgage and house is worth less than is owed, it is a double incentive to walk away because that person is not walking away from any equity,' he added.

There is criticism of banks in the region for keeping interest rates high. HSBC and the United Arab Emirate's largest home loan lender Amlak have recently put up interest rates on new mortgages by up to 2% and are now charging customers up to 9.75% monthly interest.

Ian Albert, regional director at real estate broker Colliers International in Dubai said the banks are acting in an excessive way. 'I object to banks racking up interest rates. You've got this problem where the banks are almost self-defeating themselves. If I borrow at 8% I need to lease my property at 12%, the greater my yield increases, the greater the property value is depressed,' he said.

Albert predicted that although repossessions will happen it is unclear how banks in the UAE are set up to deal with such a scenario.