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Saudi Arabia's housing predicament

March 29, 2014 at 3:04 pm

The housing crisis in Saudi Arabia is multi-faceted, deep-rooted and difficult to solve completely: but the government response has been limp at best, at times even exacerbating the problem.

Just 30% of Saudi Arabians own their home. The international average is 70%. Part of the problem is low penetration of mortgages – which account for just 2% of GDP. In neighbouring Kuwait or UAE, this figure is closer to 15%.


 

As part of the reform packages pushed through to stave off the Arab Spring, £40bn was promised towards housing. At the time, analysts estimated half a million new homes were needed to deal with a growing population. Since then, Saudi Arabia’s population has pushed past the thirty million mark. Housing statistics show a shortfall of anywhere between 100,000 and 200,000 homes each year.

But spending the £40bn budget hasn’t gone well: local media is now reporting that just under two billion has been earmarked for projects, driven by a massive shortage in land availability.

For decades, Saudis have lobbied their government for land giveaways. These royal gifts have left the government with almost no space of its own to develop, according to analysis by Adnan Ghosheh, an adviser to the country’s Housing Ministry. Ministers are tempted to build outside the city boundaries, but this will be expensive owing to infrastructure costs. Ironically, most of the land given away by the state in the past has come fully equipped with roads, power and water supplies so would have been ripe for development.

If building outside the cities is too expensive, house builders could hope for salvation amongst the private land owners within the city. However landlords have seen prices rocket by 50% in the last two years, according to local analysts, and risking expensive property development doesn’t make too much economic sense in such a buoyant market. In addition, large estates are owned by members of the royal family – who aren’t keen to relinquish their “nest egg.”

Demand is also going up and with that, prices. Government-assisted mortgages have buoyed the market artificially: these assisted buying were introduced to stimulate the affordable end of the market. However, some middle class voices are complaining the criteria for qualifying for these assisted buying schemes may have been set incorrectly, offering little help to a middle-class household hoping to buy, while flooding an already crowded market with new entrants on low incomes. Confusion in the loans programme has also led to quixotic results: small land-owners hoping to build are often unable to access government loans to develop it, because their personal earnings are deemed too high, while those without access to land have been given loans to build.

Housing demand is also concentrated geographically – with Riyadh, Jeddah and Dammam seeing significantly more need for housing than other urban centres. That’s putting pressure on these cities in particular to build faster. Each of these cities is starting to build – but focused too heavily on the luxury market. The Economic Cities Authority, a government body, also plans to develop Rabigh, Jizan, Madinah and Hail as the new growth centers or emerging cities – promising billions in new infrastructure projects and taking the pressure off existing hubs.

The developing mortgage market will also drive demand harder – although in the long term it is a positive development that mortgages will now be more feasible in Saudi Arabia. New legislation passed throughout 2012/13 saw a licensing scheme for mortgage providers and banks, and the establishment of a maximum loan-to-value ratio of 70 per cent. Mortgage proposals had been in discussion by government since 1981, when the Supreme Council of Judiciary had killed an initial attempt to introduce mortgage, after ruling that property borrowing was un-Islamic. Since then, talks had been heated, although frequently dyed off completely.

Regional insecurity has also fed into the crisis – with overland routes from Turkey blocked by the Syrian civil war, construction materials are now being shipped in, adding to costs.

Solving the “land banking” issue will be key to extricating Saudi citizens from the crisis. The Housing Minister indicated last year that those sitting on land within city limits which is not being built on could be subject to a tax. However, no firm plans have been unveiled, nearly a year after the announcement. Much of the land is owned by powerful royal interests who are politically difficult to oppose. But with housing policy clearly more successful at driving demand than increasing supply, without unlocking this land – the housing crisis will only get worse.

The crisis is felt most acutely by those earning less. According to Jones Lang LaSalle, an international real-estate company operating in the Kingdom, a third of new entrants into the workforce cannot afford a house costing more than $133,000. Almost a third of Saudis are under the age of 15 and more than half under 25 – so keeping up a steady flow of affordable housing is a demographic battle weighted against the government.

In Jeddah, $133,000 would buy you a small two-bedroom apartment. But for those earning little or nothing, including some migrant workers, it might get you a shack in the unplanned zone: the slums. The Jeddah Development and Urban Regeneration Company plans to redevelop these as part of a city-wide development package. Some families have lived there for four generations, according to a local charity. Migrant workers, who make up one in three in the slums, will likely not be considered as part of housing plans – leaving question marks over where they might go.

Migrant workers are also a problem for the government – perceived as a threat to both housing supply as well as jobs. In a crackdown which started last November, the nine million estimated migrant workers were targeted over illegal visa statuses. The government claims that 250,000 foreign migrant workers have since been deported.

Many of those deported were Ethiopians, accused of crossing into Saudi Arabia illegally through its southern border with Yemen, but workers also arrive from India, Pakistan, Bangladesh, Indonesia and the Philippines, as well as Egypt and Yemen. The government say mass deportations open up jobs for young Saudis, as well as helping with the housing crisis.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.