Saudi in dire need of mortgage reform - report

Saudi Arabia’s growing population is in dire need of an active mortgage market, with $320m in financing demand expected over the next decade, new research has found.

A report from NCB Capital has suggested that, with well over half of the Saudi population still relying on rental accommodation and over 60 percent below the age of 30, the pressures on financing demand are likely to remain intense.

Although the country is in the final stages of passing a mortgage law, there are still concerns that less affluent segments of the population are missing out on the ability to own their own homes.

“Relative absence [of mortgage-related purchases] has…created a dichotomous market where the supply has tended to be in the higher end while significant segments of the population – typically the majority – have been effectively priced out of owner-occupied housing altogether,” the research stated.

The Gulf mortgage markets are generally underdeveloped by global standards. As a percentage of GDP, mortgages are estimated to have reached 14 percent in the UAE during 2009, according to the report.

In Kuwait and Qatar, it stands at around 14 percent and nine percent, respectively.

However, the penetration rate is only between one and three percent in Saudi Arabia. The figures stand in stark comparison to rates of 50 percent and 70 percent in the US and UK, respectively.

Historically, home loans have been provided by the Real Estate Development Fund (REDF), which was set up in 1974. Between that time and 2003, REDF provided enough money to build 560,000 units.

However, the kingdom now faces an annual shortfall of 150,000 units, and REDF reported delinquency rates of nearly 57 percent in 2007.

The NCB Capital report said that the home-financing gap had led to an opportunity for private lenders.

“Approximately 86 percent of real estate purchases in Saudi Arabia are thought to be undertaken on a cash basis and the situation is not fundamentally different in the rest of the region,” the report claimed.

“Less than one percent of all Saudi home purchases are financed by mortgages as opposed to seven percent in the UAE and 66 percent in the US. Consequently, regulated, mortgage-based purchases do not yet serve as a source of market stability and continuity.”

However, the investment house also said that Saudi Arabia would need to develop strict regulation to prevent excess and the credit spiral that undermined the stability of the housing sector in the US.

“Even with mortgages, the development of the GCC housing infrastructure will inevitably have to involve an element of government-sponsored affordable housing. Nevertheless, options should be considered by gradual privatisation and even partial ownership where circumstances warrant this,” the report added.