Nov. 9 (Bloomberg) -- Saudi Arabia will face a “substantial” housing shortage by 2015 as a growing population and rising employment fuel demand, Deutsche Bank AG said.

The kingdom will require an estimated 1.2 million additional homes by 2015, compared with a projected supply of just 900,000, the German bank said in an e-mailed report today. That amounts to a shortfall of 25 percent.

“Government initiatives to enhance living standards and improve mortgage access will boost affordability and unlock huge latent demand,” Dubai-based analysts Nabil Ahmed and Athmane Benzerroug wrote. The kingdom’s market “is the strongest in the Gulf” and has remained relatively resilient.

Saudi real estate prices were down 15 percent year-on-year as of the third quarter, compared with an average slump of 40 percent in other Gulf markets, the report showed.

Saudi Arabia, a Group of 20 member, plans to spend $400 billion in the next five years to stimulate the economy. The government doubled its spending on infrastructure projects to 40.6 billion riyals ($11 billion) in the first quarter as it sought to counter the effects of the global economic crisis.

The government’s aim to make housing more affordable for Saudis will be helped by the passage of a mortgage law next year, according to the analysts. The law, which outlines rules regarding foreclosures, will reduce lenders’ risks and help borrowers benefit from more flexible and less costly financing options, the report said.

Mortgages make up just 1 percent of gross domestic product in Saudi Arabia, the lowest rate across the Gulf, the bank said.

“If approved on time, our analysis suggests that the new mortgage law could potentially increase affordable demand by 55,000 additional units per year until 2015,” the analysts wrote.

To contact the reporter on this story: Zainab Fattah in Dubai on zfattah@bloomberg.net

Last Updated: November 9, 2009 05:00 EST