How to make housing, attainable: a look at Fannie Mae
As it stands, there is a sizable portion of the population that the current housing market is not fully serving. Lynnette Sacchetto assesses how Dubai could benefit from the creation of an affordable housing strategy geared at getting more people into their own homes.
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 programe along the lines of what the United States created with Fannie Mae, could prove profitable for the government and property developers.