For the mortgage law to have a meaningful impact on the market, financing terms would need to become attainable for common Saudi nationals.
An obstacle to this is prevailing wages in the public and private sectors, which in many cases are not conducive to home ownership.
Interest rates, too, are sometimes prohibitive, currently ranging between 4 percent and 8 percent for personal loans in Saudi Arabia, depending on the tenure and type of loan.
Mortgage loan schemes typically reduce the initial down payment homebuyers require to make a purchase, which opens the door to greater home ownership among youth.
In many countries, borrowers can take 25-30 years to repay a mortgage, but we anticipate among Saudi banks, mortgage repayment periods would likely span 15 to 20 years at the onset.
An evaluation of prices for villas and apartments against average public and private sector wages illustrates the affordability challenge facing the Kingdom. Assume a Saudi buyer, a man who relies on his income alone to support a wife and three children, purchases an apartment of 190 sq m in size for SR574,167 in Riyadh (the median price of a survey I've conducted in H2 2011). Prices in Jeddah are higher than this while those in the Eastern province are lower.
Assume he places a down payment of 10 percent, or SR57,417, with a bank and receives a flat-rate mortgage of SR516,750 to cover the remainder of the loan. Rules specify this loan must be repaid over 15 years at an interest or profit rate of 6 percent. The family's home loan payment would amount to SR4,361 per month, requiring a monthly wage of at least SR12,113 (SR145,354 per year), supposing the instalment represents 36 percent of the buyer's income.
The same family's monthly income would need to be almost double that to finance a villa purchase.
The median cost of a villa 300-400 sq m in size was SR1.23 million as per the survey conducted in H2, 2011.
Assuming the same interest/profit rate and a down payment of 20%, the family's monthly instalment would be SR8,270, requiring a salary of SR22,972 (SR275,660 per year).
According to this rough guideline, the minimum salary required to mortgage villas and apartments is out of reach of a vast number of state and private sector employees, most of whom earn less than SR6,500 per month, for an annual salary of SR78,000 ($20,800). Even if loans were payable over 20 years, the minimum salary required for the above apartment would be SR10,284 and SR19,503 for the villa.
General public service personnel are paid according to 15 rank ranging from monthly wages of SR3,000 to SR28,250, most of which are too low to afford the Riyadh villa in question.
The average public service wage is SR8,850 although most employees earn an average wage of SR5,500.
A substantial proportion of wage earners would thus also be unable to finance a large apartment.
Many higher-skilled public sector professions such as pharmacists, doctors, professors and court presidents are able to afford properties, although they may also demand higher down payments.
The mismatch is even more evident in the case of private sector wages, generally lower than public sector pay.
Incomes typically rise as productivity per capita increases, but this will happen only as a greater number of Saudi nationals participate in the private sector and salaries offered by private sector firms climb. At present, there is only one Saudi employee for every nine expatriates employed in the private sector. This needs to change to enable improvement in per-capita multipliers.
I have discussed the dynamics of the labor market and the demands for reform in many published articles.
Consumer appetite is also shifting and demand for apartments is bound to rise in the next two decades due to their relative affordability.
Mortgage rates, meanwhile, will need to be gauged versus rental yields; lower rental yields could entice prospective buyers to rent rather than borrow to build a home. Yet, if given the right financing opportunities, most Saudis are most likely to opt to own a home, even in a low-rental-yield environment.
Taking these factors into consideration, widening the pool of eligible homebuyers through the introduction of the mortgage law would require a number of supplementary factors take place. For one, banks should offer longer tenures for loan repayments -- perhaps 25 years -- to reduce the monthly instalment burden. Most banks currently require repayment in 15 years, although there are limited loans carrying maturities of as high as 30 years.
The mortgage law should trigger growth in Saudi Arabia's home finance industry in the medium term, although short-term implications will be minimal unless the government increases the availability of land, pushing down prices to levels more affordable for common people. Land prices rose exponentially in the past 6 to 8 years.
It is therefore imperative in any housing market reform to consider providing residential land, supplemented with basic services and facilities, at reasonable rates in major urban centers to cater to these potential homebuyers. According to estimates of the Riyadh Supreme Development Authority, some 77 percent of land plots in Riyadh are undeveloped.
The government could allocate large parcels of land for development with basic infrastructure. If land becomes more affordable, more people will be able to build and own a home, putting to use REDF loans.
This would reduce the burden on prospective homebuyers and give the government more time to address shortfalls in the labor market and the need to raise the wage equilibrium alongside reducing expatriates.
Public funds such as the Public Pension Agency, GOSI and the Public Investment Fund could also be granted plots of land and become developers of affordable housing along with the 250,000 units currently being built by the Ministry of Housing, shouldering the risk of mortgage financing.
The mortgage law will over time push out the limits of major cities; 40 years ago, Riyadh spanned just 64 sq km and now the city occupies more than 1,000 sq km. Even if land is made more affordable rates on the periphery of cities, there are currently few public transport alternatives to accommodate for this suburban expansion, which will need to be rectified as horizontal sprawl continues.
It is crucial, therefore, to recognize that while the government's big cash injection in the Ministry of Housing and REDF last year signal its commitment to facilitating greater home ownership among citizens, structural issues facing the housing sector cannot be resolved by government spending on its own.
© Arab News 2012
