Saudi Arabia’s Mortgage Law Advances Amid Mideast Unrest
Advisers to Saudi Arabia’s king approved a long-delayed overhaul of the country’s mortgage law after the monarch pledged more than $82 billion to fund homebuilding, at a time governments across the Middle East are offering concessions to quell political unrest.
The Shura Council agreed on its final amendments to the law and passed it to King Abdullah Bin Abdulaziz for final approval, according to Saad Mariq, deputy chairman of the council’s finance committee.
“The law will propel the creation of private mortgage- finance companies and banks will infuse a lot of money into mortgages,” Mariq said in a telephone interview on April 5. “I expect to see the injection of tens of billions of riyals into the sector as a result.”
King Abdullah promised to increase spending on housing after popular protests led to the overthrow of governments in Egypt and Tunisia and targeted regimes from Syria to Bahrain. Saudi Arabia’s mortgage law will change the way home finance is regulated, from registering mortgages to prosecuting police officers who refuse to carry out eviction orders. The law, debated for a 10 years, will give rise to a private lending market that Capitas Group International estimates at $32 billion a year for the next decade.
Change Happening Overnight
“Plans that have been in the pipeline for 10 years are happening overnight because of the realization of the need for change,” Alexis Antoniades, assistant professor of economics at Georgetown University’s school of foreign services, said in a phone interview from Qatar. “The change either has to come from within the system or it will come from outside, and if it’s the latter it can destabilize the place.”
On March 18, the king announced a plan to spend $67 billion to build 500,000 homes and turned the country’s housing authority into a ministry with a budget of 15 billion riyals ($4 billion). Three weeks earlier he pledged to increase funding for housing by $15 billion.
The Shura council cleared a hurdle that had delayed the mortgage legislation for months on March 27 by passing rules that define the provider of a loan as the owner of a property rather than the borrower. That’s likely to create a smoother foreclosure process and removes a legal ambiguity that has deterred banks from lending, Mariq said. The council also resolved disputes on mortgage securitization and approved penalties for violations of the rules. The king and the council of ministers now have sole responsibility for any other changes and final approval, he said.
Saudi Arabia’s Tadawul All-Share Real Estate Development Industries Index, which includes seven developers, climbed 9.5 percent since the king announced plans to build half a million homes on Feb. 18. That compares with a 1.4 percent gain for the broader Tadawul All-Share Index. (SASEIDX) Markets are closed today in Saudi Arabia for the weekend.
The Saudi government, backed by the religious establishment, deployed troops to prevent demonstrators from defying a ban on protests on March 11. The kingdom also provided soldiers in March to help put down an uprising in Bahrain, which lies across a 16-mile (26-kilometer) causeway.
Saudi Arabia’s population has quadrupled over the last 40 years to 28.7 million, creating a growing housing shortage. The Arab world’s largest economy needs to build 900 homes a day over the next five years to meet demand, Jones Lang LaSalle said March 27.
Housing a Priority
The council’s quick action on the law after months of delays shows “the king has identified housing as one of the main problems that need to be addressed and that can only be construed as a positive,” said Loic Pelichet, assistant vice president of research at NBK Capital. “The problem remains, how quickly can things move and that’s very difficult to say.”
Affordability is the main issue facing homebuyers in Saudi Arabia, where most of the homes currently being built cater to the mid- to high-end of the market, said Saud Masud, analyst at Dubai investment bank Rasmala.
“The mortgage law is a means to create affordability by bridging supply to the user base through financing,” he said. “What is still unclear is how they will get to the half million homes in the next five years and how many people could qualify for mortgages. It’s not that many.”
The regional unrest is becoming a catalyst for efforts to bring more people into the economic mainstream, though the government has limited scope to encourage banks to lend more, Masud said. Many people won’t be able to afford existing homes and construction of houses for mid- and low-income buyers could take a long time, he added.
“Housing is one of the fastest ways to redistribute wealth to the people,” Georgetown economist Antoniades said. “It would also employ a lot of people as the construction and other support industries grow, creating a movement in the economy.”
Providing mortgages without increasing supply means more money will chase the same number of properties and prices will go up, said Marios Maratheftis, a Dubai-based economist at Standard Chartered Plc. “Saudi Arabia needs to provide homes and make it possible for consumers to get funding, and that’s what the government is trying to achieve.”
Saudi Arabia, the world’s biggest oil supplier, has the advantage of its budget surpluses when it comes to increasing spending to combat social tensions, Maratheftis said. The jobless rate is as high as 43 percent for Saudis between the ages of 20 and 24.
Money to Spend
“They have been accumulating surpluses for years and if they need to increase spending, they’re very much able to do so,” he said.
Saudi Arabia’s economy is likely to grow 5.5 percent this year on higher oil output and state spending, Banque Saudi Fransi said on April 4, raising its earlier forecast of 4.2 percent. The bank, Saudi Arabia’s fourth-largest by market value, raised its 2011 state expenditure forecast by 25 percent to $225 billion.
The kingdom, which in 2008 allocated $400 billion for infrastructure development in five years, spent about half of that amount by Feb. 2010 and the entire sum may be used up ahead of schedule, Finance Minister Ibrahim al-Assaf said.
“Social tensions probably are accelerating reforms throughout the region, but if you look at what Saudi was doing before, they were investing heavily in infrastructure. They have been doing that very aggressively,” Maratheftis said.
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