Mortgages are seen as critically important for broadening access to housing. Commenting on the issue, National Commercial Bank's Chief Economist Jarmo Kotilaine said: "Mortgages have successfully helped ensure widespread home ownership in the advanced economies but also a growing number of emerging markets have used market and regulatory reform as a way of boosting home ownership, often bringing about qualitative change within a span of years. Particularly notable cases in point include Malaysia, Korea, and Mexico. But even in the Middle East, Egypt and Turkey have systematically reformed their regulation and seen sharp increases in mortgage lending, albeit from a very modest base, especially in Egypt."
But mortgages can have economic implications that go far beyond fostering home ownership. In advanced economies, the level of outstanding mortgage lending averages 60 percent of GDP and can be as much as 100 percent. Mortgages serve as a financial accelerator as people take loans collateralized against the value of their homes so as to boost their consumption. Especially in appreciating housing markets, access to refinancing enables consumers to smooth variations in their income. Conversely, however, housing market corrections can have profound economic repercussions with the IMF estimating that output losses associated with housing market-related downturn are two to three times as severe as they would be without. The duration of such recessions averages 18 quarters as compared to four for 'ordinary' recessions.
In the words of Kotilaine, "Due to the magnitude of the opportunities and risks created by mortgage market development, proper institutional and regulatory design are critically important. The international experience suggests that the level of mortgage lending tends to be critically dependent on having adequate facilities for registering properties, ensuring cost-effective access to credit information, and providing for efficient foreclosure systems. Shortfalls in these areas tend to lead to selective lending and shorter tenors with adverse implications for access to housing. Moreover, the ability of banks to finance mortgages is complicated by the maturity mismatch between short-term deposits and long-term loans. Secondary markets are typically needed to ensure the sustained expansion of mortgage markets to the levels seen in the advanced economies."
In spite of the magnitude of the demographic challenges, mortgage lending in the GCC has to date remained very modest by international standards. Even after rapid growth in recent years, the overall industry is still estimated to total significantly less than $100 billion. The UAE, Kuwait, and Qatar have the most developed regional markets with mortgage loans totaling some 17, 14, and 12 percent of GDP, respectively. However, much of this lending has been for commercial projects rather than residential real estate. By contrast, the region's most populous country, Saudi Arabia, has a modest market estimated at some 2 percent.
Even though the past decade effectively marked the inception of modern mortgage markets in the GCC, their development in most regional economies has advanced quite far. Private sector mortgages have now to varying degrees eclipsed older government housing banks, which have since the 1970s served as the primary source of subsidized real estate loans in the region. However, these entities have struggled to keep up with the growing demand and waiting lists in some cases exceed a decade. In response, some GCC governments have recently substantially boosted the resources of these programs.
The potential for increased mortgage lending in the GCC is considerable. According to Kotilaine, "Unlike some of their emerging market counterparts, the Gulf countries have a long history of financial and economic stability. The Dollar pegs entail fairly modest interest rates. But in spite of the impressive progress, the development of the GCC mortgage markets continues to be held back by a number of regulatory and institutional hurdles." For instance, evaluating creditworthiness often remains a challenge, although Saudi Arabia and Bahrain now have centralized systems for collecting credit data.
