JEDDAH: ARAB NEWS
Published — Monday 3 December 2012
Last update 7 December 2012 3:46 am
The Saudi housing market continues to expand on the back of high population growth and increasing availability of financing alternatives. Other key determinants include the increasing Kingdom's GDP (gross domestic product), growing Saudi labor force and rising personal income, which all have a direct impact on the housing market. This trend will continue as the Saudi economy is expected to grow by 3.9 percent through 2012, according to a report by the National Commercial Bank (NCB) received here yesterday.
The Saudi housing market is already experiencing a supply/demand imbalance and this trend is expected to continue as the supply of houses will lag behind demand. Meanwhile, 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.
The kingdom's growing economy, on the back of high oil prices, has led to heavy investment in infrastructure including housing over the period 2005-2010. The Ninth Development plan for the Kingdom calls for investing SR 1.4 trillion on physical and social infrastructure between 2010 and 2014.
In 2011, a royal decree was announced to allocate SR250 billion to build 500,000 housing units under the newly established Ministry of Housing. This will accelerate the supply of housing units, especially, to the low to middle income groups, the NCB report said.
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.
Historically, Saudi household sizes have been commonly large, thereby accommodating extended families. Meanwhile, the average household size in Saudi Arabia has been noticeably shrinking over the years. 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 phenomena has been a driving force in the rising demand for additional housing units.
Demand for housing is driven by overall population growth. In addition, as previously mentioned, the average household size is on the decline, which also results in increased demand for housing units. Meanwhile, the supply of housing units has not been able to keep up with demand causing the current imbalance. On a full occupancy basis, the stock of housing units in the Kingdom increased by 1.2 million units between 2000-2010, bringing the total stock of occupied housing units to 4.6 million in 2010. This reflects the construction of 121,000 new units per annum, on average, during the same period.
The major factor contributing to the supply and demand imbalance is affordability. The commonly accepted guideline that defines affordable housing is that housing related expenditures do not exceed 30 percent of a household's income.
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.
The public and private sectors are expected to contribute to the growth in investments within the housing sector. Based on market sources for the average housing unit cost of around SR540,000, total investment required will amount to SR 1.3 trillion, in order to develop 2.4 million new housing units between 2011-2020. This represents an average outlay of SR 130 billion per annum.
The housing market has witnessed an increased commitment by private entities in the development of recent residential real estate projects. These projects, not only were sizable, but also have focused on providing home ownership opportunities in addition to improved building quality and standards. In the first half of 2011 alone, approximately SR 10 billion in contracts were awarded for housing developments.
The growth and diversification of the housing sector generally depends on a robust regulatory framework where legal policies are enforced and executed. The lack of a mortgage law in the Kingdom has hindered the potential growth of the housing sector, thus causing many financial institutions and developers to maintain low-risk portfolios. The recently passed mortgage law, including other related laws, aims to rectify currently existing obscurities and to protect the interests of all direct and indirect participants, the NCB report said.