Register for our free newsletter

Latest News

Historic Saudi mortgage reform faces big hurdles

Saudi Arabia Mortgage reform

Saudi Arabia is conducting one of its biggest economic reforms in years by allowing housing mortgages to be offered in the kingdom, but structural problems such as high land costs may prevent the market from booming any time soon.

July 4, 2012 9:43 by

After over a decade of study, the government approved the country’s first law permitting mortgages, the state news agency reported late on Monday. The news delighted the stock market; shares of banks and property developers jumped.

Lending for home purchases already takes place in Saudi Arabia but it is generally based on payments deducted by banks from salaries; the new law could allow the development of more flexible and competitive products, potentially igniting a surge of home buying and construction.

“It’s a good move in the long term,” said Paul Gamble, chief economist and head of research at Riyadh-based Jadwa Investment.

“Affordable housing for low and middle-income groups is a huge issue in the kingdom, and this move will help remove some of the key problems for this category of home buyers.”

Saudi Arabia’s housing market will need 1.65 million new homes by 2015 to meet demand, according to a report released by Banque Saudi Fransi last year. Private and public developers will need to build about 275,000 units a year for a population that has doubled in size since 1988 and is growing by more than 2 percent annually, it said.

The mortgage law, which includes regulations covering mortgage finance institutions, home leasing and legal mechanisms to settle disputes, could make it much easier to satisfy this demand for housing.

Arqaam Capital predicted in a research note on Tuesday that the amount of lending to purchase housing would double from 6 percent of gross domestic product to 12 percent, as the lack of any law covering it had been seen as a major constraint. The law will add 1 or 2 percentage points to banks’ annual loan growth rates, it said. By increasing supply of homes, the new law could ultimately help reduce Saudi Arabia’s inflation rate, which has been boosted by rising rents. At 5.1 percent in May, Saudi inflation is higher than rates in many of its neighbours.

Finance Minister Ibrahim Alassaf was quoted by the Saudi Press Agency as saying the law would be implemented within 90 days, after the central bank completed designing its own rules for the sector.


Major questions hang over the new law, however. Details have not been released, so it is not clear how the law will deal with politically and religiously sensitive issues such as whether to let a bank take away a borrower’s home in case of a default. Whatever the law says, banks and their customers may initially use it only cautiously as they wait to see how administrative officials and courts will interpret it.

Another problem is high land prices and limited supply in Saudi Arabia. In some areas, large tracts are owned by influential families which feel little financial pressure to sell or develop the land; it remains to be seen whether the mortgage law will increase their potential returns enough to convince them to trade their holdings.

Earlier this year, Saudi media reported that the consultative Shoura Council was considering the idea of imposing a tax on undeveloped land to improve supply, but the idea now appears to have been shelved.

Another obstacle is that many Saudi property developers have shied away from building low- or mid-income housing because of relatively small returns on offer. They have preferred to focus on high-return or high-profile areas such as retail projects.

As much as 75 percent of the Saudi population is under the age of 30, while many women find it difficult to work because of social custom, making it hard for a large number of families to afford buying a home.

“People just cannot afford to buy what is up for sale in Saudi,” said Mathew Green, head of research at CBRE Middle East, a real estate consultancy.

“On the one side we have a huge housing demand and on the other side the incomes do not support. So this is not a straightforward market.”


The passage of the mortgage law does, however, suggest Saudi Arabia is willing to undertake reforms needed to diversify its economy and increase employment among its citizens. Analysts believe many such reforms are inevitable eventually, including opening the stock market to direct investment by foreigners, adjusting ultra-low energy prices which encourage waste, and raising the cost of foreign workers. But political sensitivities and a desire to avoid any short-term economic instability have so far delayed change.

“It’s definitely a step towards economic reform,” Monica Malik, chief economist at EFG Hermes, said of the mortgage law.

“We have seen this in Saudi since 2000 in steps like liberalisation in the investment environment, amongst other areas. The law is also important for Saudi’s special objective to increase the ownership of property by nationals.”


Leave a Comment