It has been more than 18 months since Saudi Arabia passed its long-awaited mortgage law, its most concrete move for a decade towards ending a housing crisis that has prevented a generation of young Saudis from owning a home.
But despite the new legislation and King Abdullah’s announcement that the Saudi government would spend 250 billion Saudi riyals (Dh244.73bn) on building affordable homes for low-income Saudis, inertia remains.
Indeed, unhappiness with a system that still sees around 60 per cent of the population renting and less than 4 per cent of homes being bought with mortgages bubbled over into the media this year – Saudi activists launched a boycott campaign against the high prices of land and the difficulties citizens faced in buying homes.
The Saudi economist Fadhel Al Buainain said a Saudi employee on an average middle-class salary of 6,000 riyals would have to save for more than 30 years for a small apartment, with an average price of 648,000 riyals, in a major Saudi city.
“This campaign is to decry the malfunction in the real estate sector. Sooner or later, the skyrocketing prices will affect developers and real-estate agents as well,” Mr Al Buainain said.
While the passing of initial legislation to allow mortgages in the 29 million-strong country last summer was a step in the right direction, regulations governing foreclosure and security for lenders are still lacking, say analysts. That means banks remain reluctant to lend to low-income Saudis.
“When the price of land and rising construction costs are added to the lack of mortgage finance for the low-income sector, there is virtually no option for low-income Saudis other than to live in overcrowded multi-family dwellings or to rent apartments [for the] long term,” says Mike Williams at CBRE in Bahrain.
“It is general frustration with this situation [that] has led to the boycott.”
It is true the numbers simply do not add up for an average Saudi family looking to get on the property ladder. A survey two years ago by the property consultancy Jones Lang LaSalle found that 58 per cent of Saudi households had an average income of 5,000 riyals a month. That means that even with a functioning mortgage system, the price of a home would need to be about 720,000 riyals – a monthly payment of 2,000 riyals – to be affordable.
National Commercial Bank alludes to this in its most recent report on the Saudi housing sector, blaming the artificially high prices of land on high-net-worth Saudis using land as long-term investment options. Land, unlike equities, is a reliable asset class in an uncertain and unstable financial climate. That led to a 30 per cent spike in land prices in Jeddah in 2011, according to data from the property agency Colliers.
For analysts, this remains the biggest stumbling block for the government as it tries to make good on King Abdullah’s two-year-old goal on low-income housing. But the state itself carries some of the blame.
CBRE estimates that Saudi Arabia’s ministry of municipal and rural affairs has given away some 2.2 million plots of land to men and widows over the age of 18. Many of these are then traded on the open market, attracting huge premiums.
Given that the ministry expects 88 per cent of Saudis to live in cities by 2025, the situation has provoked calls for unused land to be confiscated and used to meet housing needs. But the fact that wealthy and powerful families own the majority of inner-city plots suggests this will be unworkable.
“Land prices have risen so far above their real economic value that it is now impossible for the private sector to build affordable housing for profit,” says Mr Williams.
“Effectively, everyone is looking in the wrong direction on this issue,” he says, referring to the mortgage law and the slow progress in construction of low- and middle-income homes.
But aside from the property investors, there are other powerful stakeholders in the land trading industry, according to a recent report by the investment bank NCB Capital. The property giant Dar Al Arkan, for example, makes 85 per cent of its revenue from facilitating land sales, according to NCB Capital’s estimates.
It is unsurprising, then, that new projects are doing little to add to the country’s residential stock.
In Jeddah, the majority of new residential supply is coming from individuals and small developers, primarily in the upmarket sector. In the first quarter of this year, 4,500 units were built in the coastal city, says Jones Lang LaSalle. All of them were in projects of 40 to 100 units.
Things are slightly more positive in Riyadh, where the ministry of housing’s new development of 7,000 new units began in July with the appointment of a contractor. The Shura Council, a consultative assembly, said it could potentially begin to tax unused land plots. The Arriyadh Development Authority (ADA) meanwhile approved a new 278bn riyals development plan that was partly designed by British architect Zaha Hadid.
Construction costs – as in other GCC markets including the UAE and Qatar – are increasing rapidly in Saudi Arabia. The chairman of the national contractors commission said last month that project costs had risen 12 per cent over the past two years as a result. This puts profit margins for contracts at as low as 4 per cent.
Speaking to the London-based Saudi daily Asharq Al Awsat, Fahd Al Hammadi said: "With construction costs going up by at least 12 per cent, contracts have started to suffer from a sharp fall in profits and large losses in some cases."
Despite these pitfalls, William Jackson, an economist with Capital Economics in London, still remains bullish on growth in the Saudi construction sector. Contrary to claims the building sector is slowing, national accounts data show construction output rose 6.5 per cent in the first half of this year, up from 4.5 per cent last year.
“I can’t see evidence of construction falling,” Mr Jackson says.
“In our view, the main driver of the Saudi [economic] slowdown over the past year – and the more recent rebound – has been the oil sector. The non-oil sector appears to have been relatively stable.”
He interprets the acceleration of construction output, along with a sharp pickup in bank loans to public-sector companies earlier this year, as evidence that King Abdullah’s public stimulus is in fact finally filtering through.
“As always with Saudi Arabia though, things are pretty opaque. It’s certainly possible that some projects are running behind schedule,” Mr Jackson says.
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