Saudi Economy To Get A Boost From Mortgage Law Approval
Saudi Arabia�s economy should get a boost after the cabinet approved the long-awaited mortgage law on 2 July. Mortgage penetration in the kingdom is very low compared to western norms and its implementation will increase home ownership. This helps to create wealth because homes can be used as collateral for businesses. And the development of institutions that both supply mortgages and securitize them will expand Saudi Arabia�s financial sector. The fact that only about 50-60% (estimates vary) of Saudis own their homes has become a growing social problem, especially given that a rise in rent over the last few years has reduced availability of affordable housing. The mortgage law news was seen as positive by equity investors and the Saudi stock market rallied with the benchmark Tadawul All Share Index (TASI) reaching 6,907.18 points on 3 July, its highest level in just over a month.
The mortgage law is a package of legislation which comprises the Real Estate Funding System, Control of Funding Companies System, Financed Leasing System, Registered Real Estate Mortgage System and Judicial Implementation System. On announcing the new law, Saudi Arabia�s Minister of Finance Ibrahim al-ʹAssaf said that these systems will be �affiliated to the Ministry of Finance.� They will provide a mechanism for funding housing that guarantees the rights of all concerned parties, and curbs costs by providing easier measures for citizens to obtain real estate funding in accordance with Shari'a law, he said according to the Saudi Press Agency. Details of the five main areas of the legislation are being worked on and should be issued within three months.
Despite the fact the banking sector is liquid and well-capitalized, home loan provision has been limited in the kingdom. Some banks had been providing home loans, but lending terms were extremely strict given that default and repossession methods were not codified in the absence of a mortgage law. �The main concern of lenders has been legal uncertainty over foreclosure,� said Jadwa Investment in a Flash Note on the mortgage law, noting that mortgage debt accounts for only 2% of GDP in Saudi Arabia, compared to more than 70% in the US and UK.
The new law provides for creation of institutions that will buy mortgages from lenders and then securitize them so that they can be sold to investors, said Jadwa, suggesting that this could enliven the kingdom�s sukuk market. The beneficiaries from the development, said Jadwa, will be banks, which are likely to become the main providers of mortgages, and insurance companies because mortgage providers will be required to take out policies to cover risks associated with long term borrowing. Also, real estate developers and cement and construction companies will get a boost in business because access to mortgages will spur home building.
Home ownership has been out of reach, especially for many young Saudis. The Saudi authorities are tackling the problem through a combination of building more affordable housing in addition to expanding financing options. They want to raise home ownership from the current rate of less than 60% to 80% by 2024 (MEES, 28 March 2011). �Widening home ownership has broader economic benefits. A home is an asset that an individual can use as collateral for borrowing,� said Jadwa, noting that as it can appreciate over time, a home is also an important source of wealth creation.
However, Jadwa said that while the long term benefits are clear, there will not be a big immediate impact from lenders because they will want to test the mortgage framework before they become comfortable with it. Also, while the mortgage law helps to address the availability of finance, it could cause house prices to rise in the short term by putting upward pressure on the cost of land as more people participate in the housing market, Jadwa warned.
Copyright MEES 2012.
