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28 March 2024

Time right for Saudi mortgage law

Boost to real estate development (File)

Published
By Nadim Kawach

Saudi Arabia should issue the long-awaited mortgage law to tap a surge in domestic liquidity and allow consumers to benefit from a sharp fall in interest rates to seek housing loans, the Gulf Kingdom’s largest bank has said.

National Commercial Bank (NCB) said the law would also allow the 12 commercial banks in the world’s dominant oil power to diversify their balance sheets following a sharp slowdown in domestic credit.

In a study sent to Emirates 24|7 on Tuesday, NCB said the government should take advantage of the growing youthful population seeking houses and an improvement in consumer confidence to issue the mortgage law that had been due to see light this year but was delayed for some reasons.

It noted that private lending by Saudi banks had slowed drastically and is yet to recover as a result of the 2008 global fiscal distress and local debt default problem involving two major Saudi family conglomerates.

“Meanwhile, there are encouraging signs that the impending mortgage law might be passed, offering a new opportunity for banks to expand and diversify their balance sheets….even though the proposed law might not provide banks with legal recourse to foreclosure, it will surely provide a much needed stimulus for banks to capture the large existing demand for mortgage finance by individuals with high creditworthiness,” NCB said.
Citing official data, it said the combined assets of the Kingdom’s banks have steadily grown over the past months to peak at SR1.37 trillion by October.

It added that with consumer credit accounting for just 13.4 per cent of GDP, the new law offers considerable room for growth.

“In our opinion, the timing could not have been any better for Saudi banks, given: (1) currently low interest rates, (2) a relatively higher degree of liquidity in local financial markets, (3) improving consumer confidence, (4) rising per capita income levels in line with our forecast of gradual economic recovery in 2010, and (5) a rapidly growing youthful population,” the report said.

“It is also worth mentioning that home ownership represents nearly 40 per cent, excluding traditional houses, based on 2007 census….hence, greater access to and availability of mortgage financing will likely give a boost to the real estate market as well as other related sectors, namely insurance.”

The mortgage law had been due to be passed this year but was delayed following heated debates by Shura (appointed parliament).

The Shura debated the draft law at several sessions before its summer recess but decided to postpone discussions although it was presented to it by the cabinet as an urgent matter, according to the local media.

In a recent study, a key Saudi bank ruled out the enforcement of the mortgage law in 2010 on the grounds it still lacks implementation details.

The Saudi American Bank Group (Samba) said it expected the new law, on the cards for more than two years, to spur banks to partially open their credit lines which they have tightened since the eruption of the 2008 global fiscal crisis and ensuing debt default problems in the oil-rich region.

 “Despite the heightened anticipation, there are no clear signs that the law will gain final approval this year. Those who have seen the law say it lacks details about implementation mechanisms, among other areas,” SAMBA said.

It said Saudi authorities are also understood to be concerned that the law, the first organized mortgage legislation in the region, would trigger a price bubble.

“Part of this concern centres around the possibility that property developers will continue to ignore the low- and mid-level housing segment, and partly around the fact that land prices in the Kingdom have themselves risen sharply in recent years as a result of speculative investment,” it said.

But in other comments, a Saudi official said the mortgage law would curb sharp increases in property prices, spur bank credit and encourage investment in the sector, one of the key components of the country’s economy.
Hassan Akeel, Undersecretary of the Ministry of Trade and Industry, said the mortgage law has become crucial to stabilize the property and construction sector, adding that it would bridge a widening gap between housing demand and supply caused by relatively low supply and population growth.

Like in nearby Gulf nations, high rents in Saudi Arabia 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, albeit lower, this year.