Residential deals slump in Saudi as mortgage costs rise

Dar Al Arkan

• Residential property deals in Saudi Arabia fell 32% in H1 2023
• Properties in Riyadh can be up to 23 times annual salary
• Villas remain most desirable among Saudis but apartments are rising

Residential real estate deals in Saudi Arabia fell by nearly a third during the first half of 2023 as higher mortgage costs eroded purchasing power.

New analysis from Knight Frank showed there were about 70,000 transactions during the first six months of the year, down from 103,000 in the same period last year, representing a 32 percent fall.

Transaction value declined at a slower rate, slipping by 28 percent, indicating a continued rise in unit prices across the kingdom.

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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, and experts say affordability remains one of the most significant hurdles for homebuyers across the kingdom.

Globally, a home priced at six times an annual salary is classed as affordable, but villas in parts of Riyadh are priced at up to 23 times salary and up to 14.5 times in Jeddah, according to Knight Frank data.

The total number of mortgages issued in the year to May declined by 35 percent year on year, while the total value of mortgages issued declined by 37 percent.

Government intervention

Knight Frank said the Saudi Ministry of Housing is working to meet the growing demand for more affordable homes and achieve the government’s 70 percent home ownership target by 2030. 

Last week, Saudi Arabia launched a new mortgage guarantee services firm in an effort to increase home ownership among nationals.

The Saudi Real Estate Development Fund launched Dhamanat, a wholly owned subsidiary, with SAR18 billion ($4.7 billion) in capital to provide insurance, alongside mortgages.

Faisal Durrani, head of Middle East research at Knight Frank, told AGBI that while the government’s drive to get renters on the property ladder has helped to drive the home ownership rate, more fundamental issues are acting as “significant demand dampeners”.

“Chief of these revolves around affordability,” he said. “While the kingdom has not been exposed to the same levels of rampant inflation as Europe and North America, the cost of borrowing has risen. This, combined with substantive house price growth, means that households are being forced into a holding pattern while they amass deposits.”

He added that household sizes are declining: “With 56 percent of the population aged below 35, this age demographic will be a significant driver of future housing demand.”

Reflecting this, there was an 8 percent increase in apartment-linked mortgages in the first half of the year as buyer attitudes toward apartment living continue to shift.

While a villa remains the ultimate goal for 41 percent of Saudis, confirmed by the results of Knight Frank’s 2023 Saudi Report, apartments have emerged as a more realistic option.

Soaring prices

In Riyadh, house prices have been increasing at an unprecedented rate over the past few years and are up by 45-50 percent since January 2020. 

The influx of domestic migrants and expats to the Saudi capital has started to create a different form of housing demand – for rental properties. 

Average apartment prices across Riyadh rose by 10 percent during the second quarter while villas registered a 5 percent price rise during the same period.

Several projects have been delivered during the first half of 2023, adding around 23,000 affordable units. Other developers are increasing their presence in the market with small residential developments of 10 to 30 units. 

In Jeddah, the housing market experienced slightly slower growth. The number of residential transactions declined 53 percent, from 4,500 deals in the second quarter of 2022 to 2,200 deals in the same period this year. The value of transactions declined at a similar rate.

“The slowdown in the market highlights the affordability threshold that has been breached in Jeddah,” said Knight Frank.

Offerings in the affordable segment are dominated by Ministry of Housing projects that are spread across the city and more than 25,000 units are expected to enter the market by 2024.