JEDDAH – The lack of affordable housing continues to be a challenging issue, which has limited home ownership for Saudis, as renters account for the largest share of the population at nearly 60 percent, the National Commercial Bank said Sunday in its “Saudi Housing Review” for the month of September 2012.
“The lack of affordable housing continues to be a challenging issue, especially the limited ownership of modern homes (villa) by Saudis. In addition, the artificially high prices of land plots, which are increasingly sought after in the Kingdom as a long-term investment option by high net worth Saudis, are accessibly limited to Saudi citizens and home developers.”
Further exacerbating the affordability issue is the lack of a regulatory framework by the government for land trading. A common practice in other countries is to impose a punitive tax on vacant land in order to curb land hoarding. The tax rate varies among countries, and even within a country’s own jurisdictions. The Office of State Revenue in New South Wales, Australia, introduced a vacant land tax of 1.6 percent of the land value between A$396,000 to 2,421,000, and 2 percent thereafter. Also, the Taiwanese government reinstated a punitive tax on vacant land to restrain property speculation. Implementing taxes, services fees, or zakat on large pieces of vacant land not intended as a principal place of residence would help release some of the vacant lands and curb escalating prices.
The current practices are attributed to land owners who believe it is a safe and tangible investment, and are willing to wait substantial periods of time to achieve higher margins. The spillover effect from the lack of adequate affordable housing has led to an increase in rental unit occupancy.
To illustrate the housing affordability issue in the Kingdom, a comparison with an advanced economy like the US highlights the growing gap between income and house prices. For instance, the median household income in the US is $50,221, while the average price of a house is close to $168,800. In absolute terms, the average American’s affordability ratio of housing to income is 3.4 times. This indicates that the average home price is 3.4 times the American citizen’s average annual income. Conversely, the average income of a Saudi is $18,851 according to the General Organization for Social Insurance (GOSI), while the average price of a house is approximately $144,000. This puts Saudi’s housing affordability ratio at 7.6 times, NCB noted.
The report said though the Saudi housing market continues to expand on the back of high population growth and increasing availability of financing alternatives, yet the Saudi housing market will continue to experience a supply/demand imbalance and “this trend is expected to continue as the supply of houses will lag behind demand.”
The report noted that the average household size in Saudi Arabia has been noticeably shrinking over the years, saying that between 2000-2010, the average Saudi household size declined from 6.08 persons per occupied unit to 5.84 persons per occupied unit in 2010, reflecting the shift from the extended family system to a smaller single family system. This phenomenon has been a driving force in the rising demand for additional housing units.
According to the latest official government data released in 2007, Saudis owned 62 percent of their homes. However, by excluding traditional houses, which account for a sizable share of housing units, Saudi homeownership significantly drops to 36 percent. Traditional houses, which include mud houses and shacks, are considered to be of lesser quality in terms of building standards compared to other housing types and are not viable as livable units. This reflects the disparity of homeownership in the Kingdom. It is unlikely for these ratios to have changed much over the past three years. Thus we believe homeownership stands near the 40 percent mark.
Given the higher number of rented units compared to owned units, this demand has caused the rental cost of living to grow by 7 percent from 2010 to 2011. The rental cost of living has increased every year, albeit at a decelerated rate since 2008. According to market sources, the average residential yields in Riyadh and Jeddah are a healthy 8 percent and 10 percent, respectively. This indicates that property owners and developers are not prepared to abandon the rental market as long as there is an imbalance between what the population can afford and what is available to them for purchase.
Total population in the Kingdom is projected to reach 37 million by 2020. Assuming the average Saudi household size maintains its declining trend thereby reaching 5.28 persons per housing unit, housing stock is expected to amount to 7,080 million units by 2020. Accordingly, total housing stock in the Saudi housing market is expected to expand by 2.4 million units during the next 10 years, with annual demand rising from 195,000 units in 2011 to 264,000 units by 2020.
It further said that while all income segments will stand to benefit from the enactment of the mortgage law, those within the affluent segment will benefit the most as loan tenors and product ranges will increase.
Moreover, the increasing Kingdom’s GDP, growing Saudi labor force and rising personal income, which all have a direct impact on the housing market, are also key determinants. This trend will continue as the Saudi economy is expected to grow by 3.9 percent through 2012.
Besides, key regulatory initiatives such as the newly passed mortgage law, once implemented, will certainly stimulate the demand for housing in the medium to long-term.
The report said that total housing stock is expected to expand from 4.6 million units in 2010 by 2.4 million units during the next 10 years, with annual demand rising from 195,000 in 2011 to 264,000 units by 2020.
Key regulatory initiatives such as the King’s injection of SR250 billion into the construction of new homes, REDF allowing banks to offer bridge financing and the newly passed mortgage law will stimulate the demand for housing in the medium to long-term.
While the global economy is still grappling with the effects of the financial crises, the Kingdom’s GDP growth rebounded in 2010 and is estimated to further grow by over 4 percent in real terms until 2014. Despite strong economic growth, the Saudi labor force market has been suffering from structural imbalances, which resulted in the unemployment rate of Saudi nationals to climb to 11 percent, the report said.
Between 2000-2009, the Kingdom’s total labor force grew by a CAGR of 4 percent and is forecasted to grow to 9.5 million workers by 2013. The continued support by the government along with policy reforms to expand the non-oil GDP, which aim to create employment opportunities, will ultimately fuel the demand for housing. Another key factor affecting the housing demand market is the rising purchasing power of consumers, which is largely driven by emerging employment opportunities, particularly in the public sector.
The young to adult age group, currently accounting for the largest portion of the population at nearly 15.2 million of the 27 million residents, will constitute the target demographic segment that seek home purchasing.
Moreover, NCB estimates the population growth rate to remain constant at 2.6 percent CAGR through the forecast period as a larger segment of the Saudi population enters the marriageable age. Thus, the total population will reach 29 million by 2013 with the majority of the population to remain in the Western, Central and Eastern regions.
Demand for housing across the kingdom has centered around the three major regions, which include Makkah, Riyadh and the Eastern province. The housing concentration in these three regions are largely based on population count, housing development and available financing. Approximately 66 percent of the 27.1 residents are clustered in those three regions.
Furthermore, the number of occupied homes in those same regions represent 67 percent of the total in the Kingdom. – SG