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28 March 2024

GCC urged to develop mortgage system

Published
By Nadim Kawach

Gulf oil producers need to develop an effective mortgage system to organize their housing sector and meet high demand for homes due to a rapid population growth, Saudi Arabia’s largest bank said on Tuesday.

National Commercial Bank (NCB) said the six Gulf Cooperation Council (GCC) countries, which control over 40 per cent of the world’s proven oil wealth, have some of the fastest population growth rates in the world, adding that growth is unlikely to slow down below two per cent a year in the foreseeable future.

“Getting mortgages right is one of the most important challenges facing the GCC region.….with the average family size furthermore experiencing a secular decline, access to adequate and affordable housing has emerged as an increasingly pressing policy priority,” it said in a study sent to Emirates 24/7.

“Yet the wealth and income distribution in the region has significantly limited the availability of owner-occupied housing as funding solutions have tended to rely heavily on personal savings and support from family and friends.”

NCB noted that bank credit for home purchases has been limited while government funding is significantly rationed.

It said this has prompted property developers in the region to veer towards the high end of the market as well as commercial real estate where the reliance on credit is far less. In some instances, it said, such tendencies have been further amplified by more stringent regulations applied to residential mortgages.

“A properly structured mortgage system can help easing these constraints by boosting the availability of funding to the middle segment of the wealth/income distribution, thereby incentivizing developers to build properties that meet the expectations of this sizeable group of buyers,” it said.

“As borrowers are able to spread their payments over a longer period, the financial burden of a home purchase becomes easier to shoulder. More problematically, the increased availability of credit can push up property prices.”

NCB cited a recent study by the International Monetary Fund, which estimated that a 10 per cent increase in household credit is on average associated with a six per cent increase in house prices.

“In spite of the magnitude of the demographic challenges, mortgage lending in the GCC has to date remained very modest by international standards. Even after rapid growth in recent years, the overall industry is still estimated to total significantly less than $100 billion in terms of actual disbursals,” it said.

NCB considered the UAE, Kuwait, and Qatar as the most developed regional markets with mortgage penetration (loans as a percentage of GDP) in the double digits at some 14, 17, and 12 per cent of GDP, respectively.

But it added that in Kuwait the majority of this lending has been for commercial projects rather than residential real estate.

It said that in some countries, these figures are based on broader categories of real estate lending. By contrast, the region’s most populous country, Saudi Arabia, has a modest market estimated at some two per cent, it said.

NCB said it believes private sector mortgages have to varying degrees eclipsed – and in some cases capitalized on – older government housing banks, which have traditionally served as the primary source of subsidized real estate loans.

It listed Real Estate Development Fund in Saudi Arabia, the Kuwaiti Savings and Credit Bank, and the Bahraini Eskan Bank.

“In spite of the impressive progress, the development of the GCC mortgage markets continues to be held back by a number of regulatory and institutional hurdles. For instance, the availability of reliable credit data remains limited, although Saudi Arabia’s Simah credit bureau, launched in 2004, is an important step in the right direction,” the study said.

It noted that Bahrain has been collecting housing credit data since 2005 and the UAE to an extent since 2006. Property registers and unequivocal title deeds remain generally work in progress but are increasingly recognized as a priority.

It said Kuwait’s law on real estate registration dates from 1959 while Saudi Arabia first launched a system for the physical identification of properties in 1984 and a Cadastre Law was adopted in 2003.

Dubai in 2008 adopted a law on an interim property registry and mortgages can no longer be issued unless a property is duly recorded there.

“But problems are sometimes still posed by ineffective building codes or inadequate standards or violations of building codes. These regulatory violations can create risks that pre-sale inspections should catch but they are not always available in a standardized way,” NCB said.

“More generally, the facilities for monitoring the markets and obtaining accurate, timely data are limited. Although price data is increasingly widely available, it is usually obtained by market practitioners, not through a centralized, methodologically consistent system.”

The study said this makes it difficult to accurately value properties, adding that because of the young age and rapid development of many markets, there are usually no clear practices on building maintenance.

“The development of mortgages in the GCC has in part been linked to addressing cultural and religious sensibilities, especially in the area of foreclosure, which are relatively recent phenomenon in the region,” it said.

“Historically, the lack of effective foreclosure enforcement appears to have been a source of delinquency with for instance some of the government lenders recording relatively high volumes of loans in arrears.”