By Edward Attwood
Sources say finance houses concerned about losses due to housing bubble collapse
Saudi banks are worried about having to deal with huge losses when the long-proposed mortgage law comes into force, a local paper has warned.
The Saudi Gazette cited business sources close to the Saudi Arabian Monetary Agency (SAMA), who said that a drop in house prices after the law comes into effect could leave banks in the red if owners fail to pay monthly installments or lose their jobs.
Those concerns are exacerbated by the current inflation in the real estate market, which has pushed the general inflation rate past six percent in recent months.
Recent studies show that there is an immediate need for three million residential buildings throughout the kingdom, and the Saudi Real Estate Fund, the major source of financing for nationals, cannot cope with demand.
However, other sources say that the implementation of the mortgage law will not revolutionise the property sector overnight.
In a recent report on Saudi real estate, Banque Saudi Fransi (BSF) warned that banks were likely to take a measured approach to home financing once the law was passed.
“While it is hoped the law’s passage will allow much wider access to property ownership, this reality could take time,” the report stated.
“At least in the medium term, the law is not poised to benefit the majority of Saudis whose monthly income stands below SR8,000. Paying SR464,167 for a large apartment and SR1.06 million for a small villa – the median country-wide prices in H2 – is simply out of reach for most young people.”
Real estate prices in the kingdom have soared recently. BSF’s Saudi property survey revealed that average prices for small villas in some parts of northern Riyadh had surged by over 40 percent in the first half.
We need to make distinctions between spiraling property prices and the need for mortgage law. Nothing is going to change drastically overnight on introduction of mortgage law as the key factors would take time to manifest in the market over a time perriod of 12 to 18 months to get the process and institutions in right place.
The north ward movement of property prices can be definitely contained in phases as the market forces would be dictated by demand and supply situation. It is not something new to note that demand side is outstripping and reams of paper pulp has been used to substantiate the same. It is essential to note that supply side is mix of two major factors i.e, supply of land with clarity of land usage and access to funds.
The law in efffect is going to make major shift for financial institutions. One is the process of registration with creation of mortgage and other is recourse to property in case of default.
Having worked some time back, It would keenly watch rollout