LONDON: Property deals in Saudi Arabia have been exempted from a 15 percent value-added tax (VAT) as the government moves to support the real estate sector.
Instead a new 5 percent tax will be applied to deals as the Kingdom seeks to boost an economy that has been hit hard by the impact of the coronavirus pandemic and weaker oil prices.
The Saudi economy contracted by about 7 percent in the second quarter as unemployment rose to 15.4 percent.
The government had in July tripled VAT to 15 percent to help offset the impact of weaker oil prices.
“The royal order aims to support citizens and ease their burden," Finance Minister Mohammed Al-Jadaan tweeted.
He said that the reduction would enable people to own homes and help to support the residential and commercial property sector.
The royal order said that the government would meet the cost of the new real estate transaction tax “for up to SR1 million ($266,616)” for Saudis buying their first home.
Despite the headwinds facing the Kingdom’s real estate sector, mortgages in Saudi Arabia have surged this year with the number and value of home loans issued in the eight months to August exceeding all of last year. More than 22,000 home loans were issued over the period with a combined value of SR10.1 billion according to a statistical bulletin issued by the Saudi Arabian Monetary Authority (SAMA).
That compares with 12,309 mortgages valued at SR5.2 billion for the same period a year earlier. The jump in house buying contrasts sharply with the slump in real estate transactions elsewhere in the region as a combination of weak oil prices and the coronavirus have hurt consumer confidence.
Demand for home loans is also spurring the growth of Islamic finance according to Moody’s, the credit ratings agency.
“Mortgages, a key consumer finance product, have been a key driver of Islamic finance expansion over the past few years, and will remain an engine of growth,” it said in a report this week.
“Despite fiscal austerity measures now in place, mortgage demand is strong, product offerings have improved and home valuations have become more affordable.”
Boosting home ownership in Saudi Arabia is one of the goals outlined in the Kingdom’s Saudi Vision 2030 blueprint for economic and social change. It includes a number of targets such as reducing the ratio between the average unit price and average annual per capita income to five times. It also aims to increase the percentage of home ownership among Saudi citizens to 60 percent. The Saudi Real Estate Refinance Company bought a portfolio of mortgages worth more than SR3 billion in July with the aim of boosting liquidity to the housing market and allowing for more loans to be issued.