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Saudi mortgage issuances fall as stock shortage bites

Saudi mortgage brokers in a land auction Reuters
Brokers and estate agents take part in a land auction – land accounted for more than 5% of new mortgages in Q1
  • Mortgage issuance drops 35.8% in Q1
  • Riyadh is only city where apartment prices rose
  • Single-family homes remain first choice of many Saudi nationals

Saudi mortgage issuance fell by 35.8 percent year on year in the first quarter of 2023, as the kingdom grapples with rising interest rates and a delay in new stock.

Residential mortgage contracts issued by Saudi banks fell to 30,213 in the first three months of 2023, according to research from real estate consultancy firm CBRE. 

Taimur Khan, head of Mena research at CBRE, told AGBI finance was a core part of increasing home ownership in the kingdom, but the higher interest rate was “a big issue” as it was encouraging buyers to delay purchasing.

Saibor – the rate of interest charged on short-term loans made between contributing Saudi banks – stands at 5.75 percent. 

The kingdom’s currency is pegged to the US dollar, and it hiked its interest rate by 0.25 percent on May 3 in line with the US Federal Reserve. 

Khan said there was still a supply lag, especially in the affordable sector, and it “will take a bit of time to come online”. 

CBRE’s first-quarter data shows that Riyadh was the only city where the average apartment price increased on an annual basis, going up by 17.3 percent. 

In Jeddah, Dammam and Khobar, apartment prices dropped by 0.7 percent, 2.5 percent and 1.6 percent respectively.  

Khan partly attributed the rise in apartment prices in Riyadh to the number of new businesses setting up there, including companies establishing their regional headquarters.  

“There’s an immense amount of demand within that, particularly for high-quality projects,” he said. 

“I think people are looking at what’s on offer and saying, 'Okay, fine, it still seems like good value despite prices going up fairly significantly.'"  

Other markets are affected more by local factors, so when affordability becomes challenging this leads to a slowdown in demand, Khan added.

Houses made up the majority of new loans at 68.8 percent, apartments accounted for 25.8 percent and land represented the remaining 5.4 percent. 

CBRE’s data shows that average villa prices across major cities in Saudi Arabia had mostly positive performances in the year through to Q1 2023. Prices rose in Dammam, Jeddah and Riyadh by 28.1 percent, 10.2 percent and 6 percent respectively. 

Khan puts this down to two reasons: standalone single-family homes remain the choice of many Saudi nationals, and there is a shortage of high-quality apartments with surrounding amenities. 

Analysts expect that market activity will remain subdued, with S&P Global Ratings forecasting that the mortgage market will drop by at least 20 percent in 2023.

“The decline in mortgage origination was in line with our expectation, primarily due to higher interest rates and due to the base effect,” Zeina Nasreddine, Saudi banking credit analyst at S&P Global Ratings, said. 

“Additionally, we saw some liquidity pressure emerging in the system over the past twelve months.

"Given the peg between the Saudi riyal and US dollar, we expect Sama [the Saudi central bank] to continue to raise interest rates when the Fed does, and therefore we foresee that the cost of mortgages are likely to continue increasing.”

Nasreddine noted that while the Saudi market is recording slower mortgage lending and origination compared with previous years, it is still growing and S&P Global Ratings expects this to go on, albeit at a slower pace. 

According to the Saudi Population Census 2022, published on May 31, the percentage of Saudi households owning homes reached 60.6 percent by the end of 2022, while those residing in rentals stood at 29.7 percent.

Saudi mortgage-free home ownership was 36.4 percent, while 18.8 percent ownership was through a mortgage or loan, and 5.4 percent were unspecified mortgages.

In 2016, the Saudi government unveiled a target of 70 percent home ownership by 2030. 

Despite the slowdown in Saudi mortgage issuance and stock delivery, S&P's Nasreddine said: "We expect it will reach the 70 percent target by 2030."

CBRE's Khan is also optimistic: “I think considering where they are now, it'll be fine.

“As new supply comes onto the market, we will see that [home ownership] number increase, particularly when the correctly priced and correctly configured units come on. I think that that'll be a bit of a game changer.”

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