The affordability challenge!

Author: 
TURKI A. AL-HUGAIL
Publication Date: 
Sat, 2012-03-31 01:40

As upward pressure on prices for apartments and villas have gained rather than having losing momentum, there is an urgent need for new units where they are required most, to provide middle and lower income Saudi nationals with single-family homes.
The government is working on several fronts to try to alleviate supply constraints by dedicating more than SR300 billion to programs assisting lower income citizens obtain funding for home buys.
There are also signs the government is striving to expedite the passage of a long-delayed mortgage law which, by delineating the rights of borrowers and lenders, could over time encourage banks to expand the risk profile of their clientele, potentially heralding a wave of growth in consumer finance.
Yet the short-term housing scenario is complex and puts young Saudi nationals at a disadvantage.
The law’s passage would have the immediate effect of spurring enthusiasm in Saudi property.
But prevailing house prices and salaries place ownership out of reach for numerous public and private sector employees, especially those in the early years of their careers.
Private and public developers will need to build about 260,000 units a year through 2017, for a total of 1.3 million homes over five years, to cater to demands of a population that has doubled in size since 1988 and grows more than 2 percent annually.
The Saudi housing market is unique in the Gulf for an undersupply of affordable units having climbed tremendously post 2006 stock market crash.
Despite price constraints, the Saudi home ownership ratio is high at 60 percent according to the 2004 general census, and 2007 demographic data showed the rate remained consistent.
The ownership rate had fallen to 55 percent from 65 percent between 2000 and 2004, over which period the ratio of average home rental costs to total income climbed to 30 percent from 26 percent, according to the Ministry of Economy and Planning data.
Some independent estimates put home ownership rates as low as 30 percent.
The government’s goal is to raise home ownership among citizens to 80 percent by 2024 by boosting supply of affordable housing and expanding financing options for citizens.
Attaining this could prove problematic, however, as two-thirds of the Saudi population are below the age of 30, including 47 percent under the age of 20.
The number of young people moving out of their parents’ homes and into independent dwellings as they reach marriage age in the coming decade is likely to surge.
The size of Saudi families has, meanwhile, fallen since the 1980s to an average 5.65 per household in 2008 from 7.4 in 1987, creating a large pool of young-people on the hunt for mid-market detached, affordable homes.
Considering the housing supply-demand gap and the impending boom in youth demand for homes, I am bullish on the housing sector and confident the mortgage law will widen the scope of home ownership in the long term.
Still, reforms to address the market’s structural deficiencies will need to complement the law. For one, developers must focus on building supply of affordable housing since prevailing salaries are largely not high enough to support a mortgage finance boom. Quality and energy efficiency must also be prioritized.
Land prices also pose a challenge.
Plots of residential land have risen sharply in price over the past few years and some estimates say land accounts for more than half of total building costs. Granting some developers the right to sell units off-plan should encourage construction of large-scale projects and such reforms must continue.
— Turki A. Al-Hugail is a economic analyst based in Washington D.C. Twitter: @TurkiAlHugail

old inpro: 
Taxonomy upgrade extras: