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Saudi austerity steps to complicate home ownership drive: JLL
October 25, 2016 / 9:46 AM / a year ago

Saudi austerity steps to complicate home ownership drive: JLL

RIYADH (Reuters) - Saudi Arabia’s austerity drive will pressure people’s ability to buy their own homes and could push housing prices in some segments down by nearly a third, the local director of real estate services firm JLL said on Tuesday.

Jamil Ghaznawi, JLL National Director and Country Head, gestures during an interview with Reuters in Riyadh, Saudi Arabia October 18, 2016. REUTERS/Faisal Al Nasser

As low oil prices strain state finances, the government is being forced to cut spending and raise fees and taxes, hurting consumers’ disposable incomes. Last month it announced cuts to allowances for employees in the public sector, where about two-thirds of Saudis work.

Such measures could slow government efforts to boost home ownership and Jamil Ghaznawi told the Reuters Middle East Investment Summit that prices of low- to middle-income homes could fall by as much as 30 percent.

“Because of a lack of affordability and purchasing power - and now as we see, reduction of salaries for government employees - we foresee further pressure on affordability,” Ghaznawi told the Summit, taking place in cities across the Middle East.

”The demand is there, but the question is: Do these people have money to buy?”

Housing and land prices have already dropped by as much as 10 percent and the fall could reach 30 percent if land prices continue to pull back from inflated levels, Ghaznawi added.

Ghaznawi estimated the shortage of low- and middle-income housing at 1 million homes, a figure which could increase because of Saudi Arabia’s young and growing population.

Over the past year, authorities have taken several steps to improve supply, including the introduction of a tax on undeveloped urban land to force more land into the market, licensing a national home finance company, and signing memorandums of understanding with local and foreign firms to build tens of thousands of units.

But the pace of construction has been slow, partly because potential buyers have found it hard to afford to purchase and because the finances of the construction sector have been weakened by government spending cuts.

SLOWER ACTIVITY

As a result, small and mid-sized developers – who provided 85 percent of the stock in the market – have slowed their activity over the past year and a half, Ghaznawi said.

In late 2014, the Saudi central bank introduced a rule imposing a 70 percent loan-to-value ratio for home loans, aiming to prevent excessive leveraging in the real estate sector. But Ghaznawi said the rule had limited commercial banks’ ability to offer property loans.

“There are only eight mortgage companies with total loans of about 5 billion riyals ($1.3 billion), compared to banks which had provided over 170 billion riyals of mortgages over the past seven years.”

The net result of austerity policies and financing curbs, Ghaznawi said, is that housing projects which in the past might have been sold out in two years would now take much longer.

”We assume that now with the salary cuts, people will start first of all shifting from buying to renting, and from renting a villa to renting an apartment until they can save for the unit that comes within the range of affordability.”

The tax on undeveloped land should increase downward pressure on land and housing prices from 2017, when the housing ministry starts to collect it from land owners, Ghaznawi said.

The ministry has said the tax will apply to about 160 million square meters of land in Jeddah, 90 million in Riyadh and 11 million in Dammam.

But Ghaznawi predicted many developers would remain wary of launching new projects over the next two years.

“I think we will have a year or two years of being cautious until the situation is clearer in terms of affordability, housing programs, salary cuts and land tax, as developers are waiting to see how they should react to all these changes.” 

Editing by Andrew Torchia and David Holmes

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