Saudi ponders reform to spur housing growth

Housing supply in Saudi Arabia is an increasingly pressing issue for the kingdom, argues Theodore Karasik

Saudi Arabia's King Salman stands during the arrival of US president Barack Obama and First Lady Michelle Obama at King Khalid International Airport in Riyadh. Saul Loeb / AFP

This month, King Salman appointed Majed Al Hogail as Saudi Arabia’s new minister of housing. Mr Al Hogail is the former managing director of a private real estate firm. He is also notable for being the fourth housing minister in eight months. So, is there a problem with this ministry and housing in general in the kingdom?

The primary issue is housing itself. There are not enough affordable homes to satisfy demand. To boot, there are thousands of undeveloped sites in urban areas. Up to half the space in Riyadh, Jeddah and Dammam is untapped.

In 2011, the government unveiled a plan to build 500,000 homes, allocating large amounts of state funds. Progress has been slow, partly because of ownership rights over land.

Significantly, property rights in Saudi Arabia play a key role in the lack of progress. Undeveloped land is often owned by those who would prefer to hold the asset. The land functions as a unit based on three land code divisions: developed land (amir), undeveloped land (mawat), and “protective zones” (harim).

King Salman is challenging these codes. Deputy Crown Prince Mohammed bin Salman, who is chairman of the Council of Economic and Development Affairs, is not only preparing new land taxation measures but is also seeking to break the bureaucratic inertia found in parts of the housing ministry.

He is seeking to shake up the property rights system by forcing large amounts of land into the market to spur home building. In addition, taxation on land is an untapped income source for the country. Four billion square metres of land could be subject to fees. Those taxes can be used to build more affordable housing for Saudi citizens.

The shortage of housing in the kingdom could become a social issue. Local media reports suggest that 62 per cent of Saudi’s citizens own their own homes, but the International Monetary Fund has estimated that excluding people living in traditional housing, the percentage is 36 per cent.

There is a shortfall of between 100,000 and 200,000 homes each year. Remember, almost a third of Saudis are under the age of 15 and more than half are under 25.

So, keeping up a steady flow of affordable housing is a demographic battle that only grows greater over time.

To be fair, the housing ministry is not solely to blame. For years, Saudis have asked for land giveaways. But those who sit on undeveloped land are leaving the ministry no space to develop new communities.

The rising housing demand is also affecting the ability to buy homes. The kingdom does offer government-assisted mortgages but this tool is limited to the high end of the Saudi market. The so-called middle class do not qualify for these types of housing loans. In addition, new entrants on low incomes can’t even get a start and thus are forced to rent dwellings. Of course, the luxury market is not a factor, but it does take up urban space.

A housing solution may be found in the Saudi Economic Cities Plan, which originated under King Abdullah. The previous monarch sought to develop six cities that featured housing, commercial space and industrial production. Now there are plans afoot to develop Rabigh, Jizan, Madinah and Hail as emerging cities. That may alleviate the problem, but will take years to bear fruit.

Finally, migrant workers are also a problem as they occupy housing in some urban neighbourhoods.

Over the past few years, the Saudi government has targeted nearly nine million migrant workers for visa offences and deported a good portion of them.

The Saudi government says mass deportations open up jobs for young Saudis, as well as helping with the housing crisis. However, just as fast as the Saudis can expel such illegal workers, they are replaced by new legitimate workers.

Overall, the good news is the crisis in Saudi housing may be turning a corner because of what appears to be a viable, robust taxation system. We will have to see if that system actually works, and if there is no push back from more traditional Saudi land owners.

Dr Theodore Karasik is a Dubai-based analyst with a specific focus on Saudi Arabia