Saudi Arabia pushes easy mortgage financing scheme

Dar Al Arkan

• Scheme to help wary home buyers
• US rates hit Saudi mortgage market
• Residential deals plummet

Saudi Arabia has increased funding for home ownership for citizens over the past year in an effort to reach Vision 2030 targets.

The kingdom’s sluggish mortgage market has been affected by high US interest rates. The Saudi riyal is pegged to the US dollar, tying the Saudi mortgage market to US interest rate fluctuations.

Residential real estate deals fell by nearly a third during the first half of 2023 to 70,000 transactions, as higher mortgage costs eroded purchasing power. 

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A spike in mortgage rates from 3 percent to 5 percent last year has impacted the appetite of buyers, particularly in the villa segment. 

Experts said affordability remains one of the most significant hurdles for homebuyers across the kingdom. 

A review of monthly data published by the Real Estate Development Fund showed it has raised funding for Sakani – a government lender set up in 2017 – to its highest monthly level in August of 941 million riyals ($250.8 million). This compares to 868 million riyals in August 2022.

The previous high was 940 million riyals in May of this year. 

Sakani arranges long-term low interest financing for Saudis to own and build on plots of land, making it more attractive for many than the commercial mortgage lenders operating since a 2012 mortgage law. 

Last year the Saudi Real Estate Refinance Co, the Saudi equivalent of US mortgage finance business Fannie Mae, extended the maturity on its benchmark for mortgages in the kingdom to 30 years. 

In July the government launched a mortgage guarantee services company called Dhamanat in a further effort to increase home ownership among nationals. 

Home ownership reached 61 percent among Saudi households by the end of 2022, according to last year’s Saudi Population Census. Real estate consultancy Knight Frank estimated the figure is now closer to 67 percent. 

In Riyadh, house prices have been increasing at an unprecedented rate, up 45-50 percent since January 2020 due to an influx of domestic migrants and expats to the capital.

But in the kingdom’s second city of Jeddah on the Red Sea coast there has been a slowdown, suggesting that prices have hit the affordability threshold for many Saudi residents. 

Faisal Durrani, partner and head of research for Middle East and North Africa at Knight Frank, said transaction volumes have fallen 32 percent during the first half of 2023 compared to the same period last year, while prices continue to rise around Riyadh. 

But the fall off in mortgage lending also reflects the success of the government scheme so far, Durrani said.

“The fact that the government’s 70 percent home ownership target is now within touching distance means many who wanted to buy have already done so.”