Saudi Arabia’s mortgage market.

Saudi Arabia’s mortgage market.

Introduction.

Housing has remained a basic human need throughout history. Over time, humans have always sought ways to improve their individual life through the improvement of their housing and the real estate sector. Consequently, Saudi Arabia has worked on promoting affordable housing through residential investment. Although housing development is essential for families, it remains a crucial indicator of the tremendous performance of the economy when the housing unit increases.

The residential development sector continued to show signs of booming through 2018. Since then, it appears that Saudi Arabia has put pressure on a significant improvement of housing, especially in the major cities. The cycle has not been the smoothest, baring the fact that the economy has been facing times of economic slowdown. Some of the financial dips were adverse that the economy failed to recover immediately. The combined factors continue to pose affordability challenges to the housing sector. Saudi Arabia has sought to improve the housing sector through the improvement of the mortgage market.

Despite the trend being weaker, Saudi Arabia expects to improve homeownership by 60% in 2020, and above 70% come 2030 (Alqahtany, 2018). Many initiatives have got instituted to try to make the target a success. Such include housing programs that reach the Saudi population and introduces them to the various regulatory efforts exerted to expand the mortgage market. Saudi Arabia’s government has focused on improving the real estate sector to launch a more active residential initiative that effectively responds to the current market dynamics. This paper aims to conduct an overview of Saudi Arabia’s mortgage market. It will include the correlation to the current economic levels, performance outlook, benefits, and challenges of the sector.

Overview of Saudi’s macroeconomic and the mortgage market.

Mortgage financing in Saudi Arabia is carried out by the 14 licensed banks in the country. The ministry of finance has a unique initiative known as the Real Estate Development Fund (REDF) that directs the outlook in the significant aspects of democracy. The mortgage market program aims to enable Saudi householders to get housing benefits and sustain their housing and finances needs. The housing program will improve the living conditions of a majority of people. It will lead to the generation of a new generation that records affordable housing through appropriate funding. The housing program integrates a specialist program that targets the deprives sectors of society. The aim is to develop local content that creates business opportunities and strengthens the economic conditions.

Saudi Arabia’s GDP has seen significant growth since the historical contraction in 2017. According to the IMF estimates, the economy has achieved a 2.2% growth through 2018 and 2019 (Aljerbi, 2019). Since the economy showed signs of recovery, it was evident that a filtering system could get observed. The general economic rise filtered through the broader system that created room for the banks to lend mortgages to the general public primarily in 2018. The aim was to drive a significant acceleration that would increase consumer spending in the housing investment in the short to medium time. During that time, the housing sector achieved a loan growth of 3.1 % through 2019. The space of expansion improved consumer confidence as then the whole economy observed price measures that coincide with the pinned development plans.

More recently, cases of inflation have reduced significantly and almost deepened into the negative territory, mainly due to the improvement of the housing sector. The real estate sector has become a keystone of government-driven initiatives. They have introduced a regulatory scheme through the mortgage law that defines a clear intent by the market to improve the housing sector. The regulatory sector aims to lead the economy in the right direction and develop a more active estate market over the coming years. In return, homeownership has got boosted, leading to the overall development and reforming of the residential market. Two schemes got developed to sustain the projected growth in the housing sector; those are the Real Estate Development Fund (REDF) and the Saudi Refinance Company (SRC).

The primary contribution of two entities aims at strengthening the housing market by creating an alley of options and products in the field. The initiatives got structured in such a way that they steer the housing sector as per the primary goals designed by the National Transformation Plan (NTP). It included plans such as doubling of the sector, which would require a 7% growth every year. Since then, Saudi’s government has made the housing sector among the most funded sectors of the economy. Over 5 years, they have allocated funds in the levels of SAR 59 billion, which is a good performance indicator and accelerator to the predetermined growth (Nafar, 2018). The residents can attest to the claim that the government is on the way to a sustainable and vibrant housing sector. It is an ambiguous step towards the achievement of the grand vision of 2030.

The implementation of the housing regeneration initiatives must involve the involvement of communities that have instead been mid-used in the medium term. Safe to say, the contribution of the communities can have a crucial impact on the success of the infrastructure as they set to act as catalysts in the ongoing economic infrastructure. They are the ones targeted by the growth over the coming years, and thus they must get involved to the fullest. From a different point of view, the people are the targets by the mortgages as they the lower level transaction that boosts the mortgages are theirs. Moreover, they determine the correction of rentals and the setting of prices for real estate sales. While the residential market has to soften over the years through 2018 and 2019 as highlighted by the major cities in Saudi Arabia, the government has not taken a tumble in ensuring that they remain within the particular market conditions that boost the recovery despite the challenges.

Performance outlook of the mortgage market.

According to Alasmari (2018), one of the major cities that have got involved in the housing development in Riyadh where the government has achieved a 60% year-to-year improvement in residential transactions, which is a good indication that the value of the sector is always on the rise. As such, the value of the sector witnessed a 55% increase through 2019 as the transition volume involving the housing sector significantly increased in pressure. The sales price also achieved a significant boost, with the previous prices rising by a significant percentage every year. In another major city, Jeddah, the numbers indicated that then sector was not only spiraling to the upward cycle but also the bottom cycle (Awliya, 2017). It was a good indication that while the government may have achieved a rise in some cities, there is still much improvement needed in others o balance the situation indicating that the market may be heading towards the bottom of its cycle. In Jeddah, the sale of apartments has been increasing, but the prices are still under pressure as the prices are still on a downward trend.

Despite the pressures on performance in the mortgage market, the Saudi government expects that the market will benefit from the regulatory efforts aimed at stimulating the sector towards producing the expected results. The current rate of urbanization has led to diversification that has created room for affordable real estate in the country. The expectation is that the government will continually roll out new programs to ease the pressure on the mortgage market. In the long run, Saudi’s people will hugely benefit from the mega projects and the large scale infrastructures that will play a significant role in the meaningful response to the dynamics of the economy. The ministry of housing in Saudi Arabia has set a target to increase the mortgage market to 500 billion Riyals from the current 300 billion Riyals by the end of 2020. They have also launched measures to stimulate the growth of the market, which includes allowing banks to offer more significant funding to the individuals who want to purchase houses. Also, they have allowed banks to provide a maximum loan-to-value rate for first-timers in the mortgage market. As such, they are determined to facilitate access to finances by all Saudis for home purchases.

Benefits of the mortgage market.

The has been plenty of talk on the future of the mortgage market in Saudi Arabia, considering that the government took over its turnover. One of the most significant benefits is that homeowners and investors have found a more relaxed way through which they can deal directly with the local bank with the government’s guarantee. Borrowers can contact the primary mortgage provider as the government has become their representative during the entire mortgage shopping. Moreover, the borrowers can get education from the mortgage professionals regarding how interest rates get quoted, which has built transparency.

Another significant benefit is the low closing costs. Since the borrowers have gained direct contact with the primary lenders who mostly are the local banks. The lenders can conduct the credit analysis and review the borrower’s credit history to make decisions on whether to deny or extend the loan. Local banks can now prepare the credit documentation in-house contrary to the previous procedures that required the decisions to get designed as a centralized unit by several banks. The process involved large banks and was always lengthy, resulting in more overhead costs and slower development of the housing sector. Nowadays, the fees have reduced significantly, opting for any borrower to run to their local bank due to the reduced closing costs.

Another merit of Saudi’s mortgage market is flexibility. The government has ensured a redevelopment of the mortgage sector that enabled the local banks to become the primary lenders. It became more likely that mortgage shoppers do not require to go to the national banks, which created a unique financial situation of flexibility. The flexibility is diverse and involves other services like fixed rates, 30-year, and 15-year mortgage advantage, which includes less interest charges and less risk of default. The flexibility has spread out over the whole market and has become an essential benefit in the shorter period and other terms.

Challenges in the mortgage market.

According to Al-Darbas  & Al-Wasmi (2019), the challenge of the mortgage sector has been on affordability across cities in Saudi Arabia. Such has been due to the underpinned growth rate in consumer income. Such has led to the mismatch in the targeted ends within the market sector. As such, the government has not successfully allocated sufficient resources to sustain the housing needs. According to the projected cost of housing as estimated by the ministry of housing, Saudi Arabia will require to have substantial financial resources to accommodate the rising cost of housing needs. As it appears, the mortgages are not unlimited, and the Saudis cannot get a guarantee that they can get whatever amount they want from the banks. The challenge has amplified due to the many people requiring affordable housing.

The second challenge facing the Saudis mortgage market is the non-availability of affordable land, especially in urban cities. In other cases, there are low-income houses in the cities which limits the space for development. The fast urbanization has pushed then prices of land, which has hugely affected affordable housing while the mortgage market might be booming, the cost of infrastructure might limit the finance funds and thus becoming a major issue to the sector. Aside from the cost of land, the non-transparency in land ownership has also limited the progress. There have been cases of non-transparent registrations and transfer of title deeds. Investors are not willing to put up the mega projects on a piece of land that does not have the rightful owner. Vague properties, foreclosure laws, and weak regulatory frameworks have limited the performance of the mortgage market. Although Saudi Arabia is ranked 2^nd globally on title transfers with only 2 procedures, the processes sometimes experience flaws that hugely limit the progress.

Conclusion.

Saudi Arabia cannot sustain the ever-increasing housing needs without ensuring endless efforts to promote the mortgage market. The long-term maturity in the housing sector requires the government to assure the lending institutions that liquidity risk is well measured. The funding sometimes becomes scarce, and the primary funding institutions requires that those individuals to ensure responsibility as documented in the best practices. The government has a significant impact on the emerging market. They have the massive responsibility of creating an environment that promotes a well-developed banking system. They must make sure that the conditions of the banking system correlate with the development plans in the housing sector and the existence of the investors.

The other role of the government lies in securitization. The government must set a clear understanding of the risk of credit for those who have secured the mortgage and the funding institution. It all leads to the requirements to have prudential mortgage regulations that cut through the needs of the investors and the procedure of collections by the funding institution. The government must design a refinancing strategy that steps up the pledges by the investors and make sure that the procedures are transparent and can yield curves that depict an underlying vigor in the market. Moreover, instead of providing support to the market, they can come up with ways through which they can lend the people directly. It would become easier for single-family housing and non-conventional housing like manufacturing structures, which might prove expensive in some instances. If not, they can provide loan guarantees as a support mechanism to give everyone a chance to benefit from the administered mortgage program. The market evolution does not require the mortgage to get fully developed for the growth of the housing sector but requires more transparent benchmarks of the market curves that emerge.

References.

Alasmari, F. (2018). An Institutional Analysis of State-Market Relations in the Saudi Arabian Housing System: A Case Study of Riyadh.

Al-Darbas, A. M., & Al-Wasmi, M. E. (2019). Challenges Facing Real-Estate Mortgages in the Arabian Gulf Region. Arab Law Quarterly, 33(1), 81-98.

AlJerbi, A. S. (2019). The evolution of the housing sector in Saudi Arabia. مجلة العلوم الإقتصادية و الإدارية و القانونية, 3(10).‎

Alqahtany, A. (2019). Developing consensus-based measures for housing delivery in the Dammam Metropolitan Area, Saudi Arabia. International Journal of Housing Markets and Analysis.

Awliya, S. A. (2017). Experiences of Suitable Housing Developers in the Jeddah Metropolitan Area, Saudi Arabia (Doctoral dissertation, Argosy University/Twin Cities).

Nafar, N. (2018). Affordable Housing Development and SDGs The Role of Islamic Finance.