Proposed mortgage law to curb prices

The approval of the long-awaited mortgage law in Saudi Arabia this year is expected to curb sharp increases in property prices, spur bank credit and encourage investment in the sector, a Saudi official said.

Hassan Akeel, Undersecretary of the Ministry of Trade and Industry, said the mortgage law has become crucial to stabilise the property and construction sector, which he described as one of the most important components of the gross domestic product in the world's dominant oil power.

Quoted by local newspapers, Akeel did not specify when the mortgage law would be issued this year, but said it would bridge a widening gap between housing demand and supply caused by relatively low supply and population growth.

"The mortgage law is intended to expedite the cycle of real estate investment and this will reduce the vast housing gap in the kingdom," he said. "The pillars of the real estate market in the country in the coming period will be based on growth in domestic demand, correction of prices and the approval of the mortgage law, which will help curtail price rises. We also expect a decline in the prices of building materials, continuation of government construction projects and an acceleration of bank credit to the property sector."

Akeel estimated the total credit extended by Saudi Arabia's 12 banks to the real estate sector at about SR6.5 billion (Dh6.36bn) in the first quarter of 2009. He gave no data for the rest of the year, but said investment opportunities in the property and construction sector would be encouraging after the approval of the mortgage law.

He said the real estate and construction sector is one of the main drivers of the kingdom's economy and is the second largest component of GDP after oil.

His figures showed the sector's contribution to GDP stood at about 7.2 per cent in 2009 and that it expanded by a staggering 50 per cent during 1999-2008, an annual growth of about five per cent. In 2009, the sector contributed by about SR55bn to GDP and it accounted for 9.5 per cent of the non-oil GDP.

"All related parties in the kingdom realise that the continuation of increases in rents and property prices is not in the interest of any one… there is a pressing need to determine the real value of property in the market," Akeel said.

"We also need to support the concepts of transparency, governance and disclosure by private institutions in this sector."

High rents in Saudi Arabia, like in the other Gulf nations, were among the key reasons for soaring inflation in 2008 along with a surge in imported products, food prices and strong domestic demand due to high oil prices. Despite a sharp decline in inflation in the kingdom in 2009 from a record 9.9 per cent in 2008, they remained relatively high due to rising rents.

Analysts expect high rents to remain the main reason for inflation this year.

"Rents will remain the main source of domestic inflation, as the supply of new property fails to keep up with demand. Greater provision of real estate should ease rental inflation through the year," said the Riyadh-based Jadwa Investments, one of the largest Saudi financial consultancy firms.

"However, it is notable that rental inflation increased in year-on-year terms in December, the first time this has happened since July 2008 (in month-on-month terms the rate was at a seven-month high).

In a recent study, Saudi Arabia's largest bank, National Commercial Bank (NCB) expected banks in the kingdom to reverse several months of a tight credit policy and open up their lending coffers after the mortgage law is released.

NCB said the mortgage law offers a huge investment potential to the country's banks and this could allow them to end their strict credit approach and entice them to invest more at home after accumulating record funds abroad.

"The mortgage law will soon be passed in the kingdom, offering a new opportunity for banks to expand and diversify their balance sheets," said the report. "In our opinion, the timing couldn't have been any better for Saudi banks, given the currently low interest rates, a relatively higher degree of liquidity in local financial markets, improving consumer confidence, rising per capita income levels in line with our forecast of gradual economic recovery in 2010 and a rapidly growing youthful population."

The report noted that nearly 44 per cent of housing units in the kingdom are being occupied on a rental basis by about 38 per cent of Saudi Arabia's population.

"Hence, greater access to and availability of mortgage financing will likely give a boost to the real estate market and other related sectors, such as insurance," said the NCB study.

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