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Saudi mortgage law yet to have desired impact

Assumptions on expected housing demand levels queried in new report

NEWS, Business

The mortgage law introduced in Saudi Arabia in the middle of last year with a view to kick-starting the home lending market has yet to have the desired effect, according to a new report.

CBRE's latest Marketview report on Saudi Arabia states that the much-highlighted shortage of new homes has been attributed to the fact that there is a lack of security for lenders in the event of defaults.

The mortgage law, which was debated for around 15 years, is an attempt to resolve this.

"Sadly, this has not proven to be the case, with most focus applied to finance companies rather than banks," said CBRE's head of research & consultancy at CBRE's EMEA research division.

He adds that this may change, though, as several additional laws covering mortgage financing are planned.

The report also questions the widely-held assumption that Saudi Arabia needs the 500,000-plus number of new homes that are often cited in order to fill a perceived gap between demand and supply.

Currently, the current average size of a household in the Kingdom is six, which assumes there are 2.7m households. 

"Through natural population growth, the Saudi population is growing by around 2.5% per annum; if we assume a constant household size, this would be equivalent to 70,000 units per annum."

CBRE argues that there is a difficulty in assessing true housing need as it requires a judgement on what the average household size should be.

Household sizes in Saudi have fallen slightly in the last decade - from 6.08 to 5.94 - and many analysts have assumed that argued that the long term trend will be for Saudi to move closer to five people per household (the Western European norm is 2.5).

"This immediately implies a housing shortage of over 500,000 homes. Because this is precisely what many analysts have done, the requirements for meeting housing need growth together with perceived existing shortages are considerably large.

"However, this assumption regarding appropriate household sizes can readily be challenged by data from high-income economies in the region such as Qatar and Abu Dhabi, where household sizes for nationals are around 8 and 6.5 respectively," he adds.

"In these economies there is no shortage of housing for nationals and maybe we should start to reconsider whether the shortages calculated by analysts are actually as significant as they are assumed to be."

CBRE said that if demand for housing is only being stymied by the lack of available stock then the impact should be seen in rental levels.

Howver, despite rapid increases in high-demand areas in cities such as Riyadh and Jeddah, the report states that "rental rates in many parts of the Kingdom’s major cities are hardly rising at all".

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