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Beyond the reach of many
Oil-rich Saudi Arabia may be the biggest construction market in the Middle East today, as it uses petrodollars to build whole cities and accompanying infrastructure.
- By Abeer Allam, Financial Times
- Published: 23:41 October 3, 2008
Riyadh: After months of frantic but fruitless efforts to secure a home loan and buy a house, Hazim Bahjat's wedding date was approaching and he had to change plans. He and his bride-to-be settled for renting an apartment in Riyadh, the Saudi capital.
"Getting a bank loan was virtually impossible. Looking for a place to rent was not much easier,'' says the 26-year-old lawyer.
He struck up a friendship with a real estate broker handling a building and visited him every day for a month to ensure he did not lose the opportunity.
Oil-rich Saudi Arabia may be the biggest construction market in the Middle East today, as it uses petrodollars to build whole cities and accompanying infrastructure.
But for young Saudis, who make up the majority of the population, finding affordable housing, and financing it, is a struggle.
Much of the construction is beyond the reach of the average Saudi in a country where people at the start of their career earn only 5,000 riyals (Dh4,776) a month.
Many projects are gated communities, luxury hotels and villas, or involve the expansion of infrastructure.
The kingdom needs at least 1.5 million units in the next five years, a shortage aggravated by changing social habits. Young couples, who years ago might have lived with their parents, now want their own homes.
Increasing oil revenue, which has fuelled growth that averages 4.3 per cent since 2003, and rising demand for real estate, have contributed to spiralling rents and property values.
New legislation
Official reports say annual real estate inflation reached 18.5 per cent in August, but some brokers and tenants report increases in rents of more than 30 per cent.
In an attempt to dampen inflation and widen property ownership, mortgage legislation was passed in July. The law, which will let investors set up specialised mortgage companies and allow banks to expand their lending, has drawn approval from developers and brokers. It still needs final approval from the cabinet and supreme economic council.
But while the law is expected to ease constraints in the long term, its immediate impact has been to contribute to a wave of real estate speculation.
Abdul Aziz Barakat Alham Wah is a financial adviser and land broker who is forming a mortgage company in anticipation of a sharp rise in prices. He estimates that 20 per cent of the increase in real estate prices is caused by speculation. Some analysts doubt that the legislation will go far enough.
"Even if you have a mortgage law, how many people can afford the property?" asks John Sfakianakis, chief economist at SABB, the Saudi bank.
"The demand is from the low-income segment and the supply is for the high, high-middle income. They are building villas and expensive palaces rather than apartments.''
"We are in a disaster situation for many people," he says. "It is about social justice. How can you claim economic growth with a growing population working for the public sector which has no access to this wealth?"
He suggests a system in which the government provides banks with guarantees to encourage extending mortgages to middle-income and low-income Saudis.
Bahjat, who makes about 10,000 riyals a month, does not think he will fulfil his dream of owning a house in the foreseeable future, even after the mortgage law becomes effective.
"With the prices they are offering, I definitely cannot afford to buy a house."
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