Case Studies

As it stands, there is a sizable portion of the population that the current housing
market is not fully serving. Lynnette Abad, Director of Data & Research at
property finder group assesses how Dubai could benefit from the creation of an
affordable housing strategy geared at getting more people into their own
homes. Co-authored by: Carla Maria Issa

Given that the UAE government is revisiting its previously established rules regarding the
residency visa structure already, it would be appropriate to consider how home ownership
factors into these revisions. The most recent figures from the National Budget estimate that
both the real estate and construction sectors are estimated to grow 4.7 percent and 5.4 percent
on an annual basis, respectively. Although there is steady growth in key sectors, there are a
few persistent issues when it comes to home ownership for residents living in Dubai.

The first is the reality that a home purchase is one of the largest investments one will make in
their lifetime. A home’s intended use is long-term but given that residency is linked to
employment for the majority of residents in the UAE, people either resort to being forever-
renters, wasting a ton of cash that could otherwise be invested in their own home, or it is a
purchase done with the foresight of only 7-10 years. In the US, when the decision is made to
purchase one’s home, common terms for repaying a mortgage fall between 20-30 years.

The second issue is the current lending system, which prevents the majority of Dubai’s
residents from being eligible to apply for a traditional mortgage, as they don’t meet the
common minimum monthly salary requirement of AED 15,000. According to Oxford
Economics, 22 percent of Dubai’s residents make between AED 9,500-21,400 per month, 5
percent of which earn between AED 3,050-9,175 monthly. Painting a less optimistic picture
is a 2017 labour force survey from the Dubai Statistics Center (DSC), which categorizes 40
percent of those surveyed as earning AED 19,999 per month or less, 30 percent of which are
earning AED 9,999 or less.

Despite these two data sources creating a gap of what we would classify as unresolved, we
have to admit that there is still a sizeable portion of the population that the current housing
market is under addressing at best. Referring to DSC’s 2018 Consumer Price Index, 2018
prices compared to those in 2014 have risen by 11 percent overall, with double digit increases
in housing, education and transportation.

Furthermore, wages for a large chunk of society are stagnating, and even falling, as GDP per
capita is decreasing rather than increasing as reported by Standard & Poor in September.
Combined, these factors make it difficult for people to make the required down payment
toward a home. These are employed individuals who could presumably be homeowners if
only there was a more inclusive financial framework that could allow the lender’s risk to be
manageable. This in turn would allow for more capital to be lent to borrowers, generating
wealth for the lenders as well as long-term assets for homeowners.

Fannie Mae: The United States’ Establishment for Affordable Housing
When we look to where affordable housing strategies were successfully implemented, the
creation of Fannie Mae, and subsequently Freddie Mac are a sufficient example. When

Fannie Mae was established, the housing sector comprised 10 percent of the United States’
total economy. As of 2017, in the UAE, the housing sector comprised 13.5 percent of the
nation’s economic activities, not accounting for financial activities.

In 1938, President Franklin D. Roosevelt and Congress created the Federal National
Mortgage Association, which is more commonly known as Fannie Mae. Due to the number
of borrowers who defaulted on their mortgages after the Great Depression in 1929, the credit
sector was both unable and unwilling to lend to those it deemed not to be creditworthy.
Fannie Mae rescued the housing sector in a time of great need, as it essentially bought
mortgages from other lenders giving them new capital to loan to other borrowers. This
system continued to work this way for the next 30 years.

In 1968, the Vietnam War was having serious constraints for the National Budget so Fannie
Mae was removed from the government’s books and converted to a public company, listed on
the New York Stock Exchange (NYSE) and thus becoming the burden of investors. Despite it
being a publicly traded company, its purchasing power is now in the trillions and is thus
deemed far too big to fail and is implicitly insured by the government. Due to the
government’s interest to avoid monopolistic business practices, Fannie Mae’s “competitor”,
The Federal Home Loan Mortgage Corporation (Freddie Mac), was established in 1989, with
the same mandate as Fannie Mae. Freddie Mac is also government backed and aims to push
the banking sector to issue as many loans as possible.

From Fannie Mae’s inception until today, should the agency run into financial trouble as it
did in 2008, a crisis which was actually a consequence of poorly managed derivatives and not
a consequence of Fannie Mae’s practices themselves, US taxpayer money is used to fuel the
agency or more appropriately, the housing sector. When the agency began, Fannie Mae’s first
$1 billion came directly from the government. As banks would lend to everyday borrowers,
many who wouldn’t have qualified for a mortgage previously due to factors such as having
an insufficient salary or little to no assets to their name, Fannie Mae would essentially
underwrite that bank’s mortgage with its available funds and thus ensure that if that borrower
did end up defaulting, the bank’s risk would be mitigated. Fannie Mae operates by taking all
of the mortgages it underwrites and repackages them into mortgage backed-securities, which
are traded amongst investors. As this practice became more successful, Fannie Mae’s ability
to generate more profit produced a cyclical effect as more money was then available for the
lenders.

For residents who would otherwise have to rent, or take on a potentially dangerous loan with
exceptionally high interest rates and strict repayment terms, Fannie Mae provided the
opportunity for many blue-collar workers and middle income individuals to become
homeowners. As of 2013, Fannie Mae and Freddie Mac owned or underwrote 47 percent of
all single-family mortgages. Despite the crisis that happened in 2008, the framework for this
system of “safe lending” overwhelmingly produces favourable outcomes for those involved.
Many talk about the market in Dubai maturing, but a true maturation of the market will not
come without more inclusion. Relegating home ownership for the wealthy minority
ultimately slashes a much wider opportunity for banks, secondary lenders, developers and the
government to address the majority market.

A prime opportunity is on the horizon as expectations are predicting 25 million visitors for
Expo 2020, and thereby the desire for at least a fraction of those visitors to look to relocating
to Dubai.7 Just like the millions of expatriates who call Dubai home, the incredible
infrastructure, as well as the numerous opportunities across various sectors, continue to lure
people to this city.

There is an obvious tipping point approaching. If population growth estimates by the Dubai
Statistics Center as well as the United Nations Population Division of 5-7 percent growth per
year, materialize then current and upcoming residential supply may not be enough. However,
if growth falls below these estimates, then there will need to be a more formative process to
sell the units in the market.

In the effort to create a more tangible permanency, all while drawing both financial and
human capital, a government stimulus programme along the lines of what the United States
created with Fannie Mae, could prove profitable for the government and property developers.