A landmark mortgage law approved by Saudi Arabia on Monday would tackle soaring property prices, spur lending and give a strong boost to the economy but it will take time before its full results are felt, a local study said on Wednesday.
“The law is a very important step in broadening home ownership. It will help to tackle one of the most pressing social issues for many in the Kingdom and will generate significant benefits to the economy,” said the study by the Riyadh-based Jadwa Investment, a key financial firm in the largest Arab economy.
“However, we think it will take some time before the full benefits of the mortgage law are realized and that the initial impact will probably not be substantial.”
The report noted that it has taken several years for the mortgage law to be approved partly because it is complex legislation.
Rather than one law, what was approved on Monday is a package of five laws that not only provide the framework for enforcement of mortgage contracts, but also cover mortgage registration and real estate financing companies, it said.
Detailed policies, implementing regulations and licensing arrangements are in the process of being drawn up by the government and should be issued 90 days from the endorsement of the law. Mortgages will be based on an Islamic lease financing (ijara) model, according to officials.
Jadwa said that estimates vary, but in general indicate that less than half of the Kingdom’s population own their own homes. This is primarily because those on low and middle incomes have been unable to afford a property. In turn, this has contributed to shortage of housing for this market segment, it said.
As a result, rents have risen rapidly-- by an annual average of 11.4 percent between 2007 and 2011-- and the absence of affordable housing has become a central issue for many, the report showed.
Although housing finance from local banks and some property developers has been available for some time, generally lenders have adopted conservative standards, so mortgage penetration is low.
The report showed mortgage debt accounts for around 2 percent of GDP in the Kingdom, compared with more than 70 percent of GDP in the US and UK.
“The main concern of lenders has been legal uncertainty over foreclosure. The mortgage law codifies the foreclosure process and will therefore give housing finance providers greater confidence to lend. In the event of a bankruptcy, the mortgage is senior to all other loans. Greater access to mortgages should also improve building standards and transparency, as developers have to be licensed and properties approved to be eligible for a mortgage,” Jadwa said.
“This will encourage developers to step up their presence in the market and, as they can buy construction materials such as cement in bulk, should reduce prices. The new law should also simplify property registration and put an end to overlapping claims, which have prevented the development of some lands.”
.The report noted that widening home ownership has broader economic benefits, adding that a home is an asset that an individual can use as collateral for borrowing. This borrowing, it added, could be used to finance small businesses or other productive ventures.
“A home is also an asset that could appreciate over time and therefore a potentially important source of wealth creation…..broader home ownership could also spur domestic consumption, as home owners are likely to spend more on furniture and household goods than landlords,” it said.
“Although the long term benefits are clear, we do not think there will be a large immediate response, as lenders will test the mortgage framework before they become comfortable with it. It will take some time before this can happen, as it requires a new borrower to fail to honor their repayments consistently.”
Jadwa said it believes banks may not be completely comfortable with the legislation until they can see the revenue they will obtain from the sale of a foreclosed property, adding that the law states that foreclosed real estate will be sold through an auction system.
“Finally, while the mortgage law helps to address availability of finance, it will not have an immediate impact on the supply of housing or on affordability. In fact, over the short term higher demand stemming from the availability of mortgages could cause house prices to rise. It could also put upward pressure on the cost of raw land, which is already an impediment to the provision of housing for those on low and middle incomes,” it said.
“Although we think it will take time for the full benefits of the mortgage law to be felt, there has been a clear positive impact on the stock market. This is likely to fade after the initial excitement dies down. Nonetheless, the long-term outlook for the sectors below has improved due to the passage of the mortgage law.”