Can Saudi Arabia’s new mortgage law, which comes into force this month, help solve the kingdom’s housing shortage? Published in The Gulf, October 2012
In early August, Saudi Arabia’s Public Pensions Agency (PPA) launched a new housing project in Jeddah. Construction work on the 1,180 villas and 6,160 apartments should begin before the end of the year and the scheme will play a small role in helping to address the country’s chronic housing shortage.
Estimates of the number of additional homes that Saudi Arabia needs typically range from 150,000 to 200,000 a year. But while the new units in Jeddah will no doubt be welcomed by those who come to live in them, they share one characteristic that is all too common across the country: their high price. According to the PPA, the target group for the villas and apartments is middle and upper middle-income people.
The Saudi housing market, as it currently stands, does not work well. In Jeddah, as in the rest of the country, too few homes are being built and those that are tend to be aimed at the most affluent. Little is being done to provide affordable housing for low- and middle-income Saudis.
At the root of the problem is a simple issue of supply and demand. Those that can afford to buy new homes are overwhelmingly the most affluent Saudis and, as a result, developers focus their efforts on them. The reason why so few Saudis can afford to buy is because they are unable to borrow money. Mortgages are not illegal but the market barely exists because there is currently no mechanism for banks to repossess a property if a borrower defaults on a housing loan.
That situation should change this month when the country’s first mortgage law – actually a collection of five inter-linked pieces of legislation – comes into force. The cabinet approved the final draft in early July and, once it comes into force, it could provide banks and developers with the incentives they need to change their approach.
“The law includes measures around conflict resolution and offers mechanisms for foreclosure. There will now be legal recourse to enforce payments,” says an economist at one major local bank.
“If this is done right it will transform the sector. The most important thing now is that we’ll have a system in place. The fact that it exists will create a defined regulatory framework for the financial services industry.”
However, how big a difference it will make to the housing market in Saudi Arabia – and how quickly – remains to be seen.
Some mortgages are already being offered in the kingdom, but the volumes are tiny. Currently, the total value of mortgages is equivalent to about two per cent of gross domestic product (GDP), compared to five to 10 per cent in the rest of the Gulf Co-operation Council (GCC), according to credit ratings agency Moody’s Investors Service.
The agency estimates that housing loans currently constitute just three per cent of Saudi banks’ loan portfolios and, while it expects the new mortgage law to create “a sizable new asset class” which should boost the profitability of Saudi banks’ retail networks, this may not happen very quickly.
“The growth in mortgage loans will likely be gradual,” says Christos Theofilou, an analyst at Moody’s. “We expect Saudi Arabia’s conservatively supervised banks to exercise caution and continue relying on strict affordability and underwriting criteria. Saudi Arabia has the strictest regulatory limit on consumer lending in the GCC at 33 per cent of gross salary, compared with 40 to 50 per cent across other GCC countries.”
The chances of the mortgage market expanding quickly look even more remote in the context of the jobs market. Unemployment in Saudi Arabia is 11 per cent, but it jumps to 28 per cent for women and 48 per cent among 20 to 24-year olds, according to a recent report by Booz and Company and the World Economic Forum. As well as having no job, these people are effectively excluded from getting a loan to buy a house too, as mortgage repayments are directly tied to salaries.
The authorities in Saudi Arabia may yet loosen some of the restrictions on borrowing limits, but they are keenly aware of the risks of a real estate bubble emerging as it did in Dubai in recent years, so they are unlikely to make substantial changes.
Until more buyers emerge in the lower end of the market, developers will be unwilling to devote the kind of resources that are needed to meet the country’s housing shortfall. Even as they wait for that to happen, developers can also face difficulties in raising finance. “Banks currently look at a developer and often probably judge him on the merits of him as a person rather than on the merits of his scheme,” says another Saudi banker.
Notwithstanding these problems, though, there are some who appear confident that the ingredients are there in the Saudi market to meet the challenges it faces, with the help of the new mortgage law.
“There are already quite a few companies and developers that are in mid-market and affordable housing,” says Shahid Umerani, chief executive officer of JAJ Consultants, a Dubai-based firm of real estate advisors. “They are already building and developing. Possibly it will pick up momentum. Some companies are sitting on huge land banks which they are going to put to work.”
What is clear is that the law can only provide the framework for a more vibrant housing market in Saudi Arabia, but it cannot on its own solve all the issues. For that to happen will take smart leadership by regulators and a new approach from banks and developers, and it will take time for all these elements to come into play.
“While the mortgage law and its supporting regulations will provide an important foundation, the long-term outcome on the mortgage market will depend on many factors, the most important of which is whether the regulations will be administered effectively and efficiently by the concerned government bodies,” says Naveed Siddiqui, chief executive of local real estate consultant Capitas Group International.
It seems that, while the wait for the law is now almost over, there may yet be more delays before the market takes off.