Soaring construction costs hit Saudis

[Naveed Yaseen]

RIYADH, Sept 3: Owning a home has never been more difficult for most Saudis.

Soaring construction costs, land speculation, lack of bank financing and poor government assistance have aggravated a housing deficit estimated at some one million homes and driven rents higher.

Realtors say the percentage of home ownership stands at about 30 per cent, making it the lowest among the oil-driven economies in the Gulf Arab region. Saudi Arabia has five to six million homes.

“It is a challenge they have to address when you have 65 per cent of the population on rent,” said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi subsidiary.

“Many Saudis feel there is an obligation that during this economic boom people have to be housed ... If people don't have equity and the only thing they have is, say, a car, then what is it that they have to pass down to the next generation?” he said.

It is an awkward situation for policy-makers in the world's No.1 crude exporter that exposes some of the weaknesses of its wealth distribution policies, at least on a regional scale.

Hopes, raised over the past six years by the oil price surge, suffered after a stock market crash in 2006 wiped out savings for 10 of thousands and forced many to abandon plans to own a house.

Now, as potential buyers and investors await the government's approval of a mortgage law -- almost a decade in the works -- doubts persist on how effective this law would be in widening the scope of home ownership in the kingdom.

Abdul-Rahman Zamil, a former government minister and member of the advisory body that drafted the law, told al-Madina newspaper in July that the law does not cater for the 85 per cent of Saudis who earn less than 60,000 riyals per ($16,000) year.

The full text of the law has yet to be published.

“We have a supply/demand disconnect. Demand continues to grow and supply is continuously lagging. We will continue to have appreciation of property prices in an under-supplied market and this will not fix an important part of the inflation problem, which is rent,” Sfkianakis said.

The Saudi property market now fits more with the needs of high-income households than those with middle-income and below, investment bank Rana Investment said in a report last month.

“Saudis with middle and low income still suffer from a deficit in available housing units that suit their savings,” Rana said.

The government has launched plans to build four fully-integrated economic cities which will showcase a modern face of the conservative kingdom that matches the glitter and the heights of Dubai's skylines.

But many believe that the tens of thousands of housing units that will be offered in these cities will be affordable mainly to the foreign expatriates working in the country.

Nor does much help come from state-owned Real Estate Development Fund which provides housing loans to poorer Saudis.

Saudi media often criticise the fund for not having enough cash to respond to big demand and for lengthy procedures which may take several years before a loan application gets approved.

The maximum amount of money the fund lends has remained unchanged for almost 35 years at about 300,000 riyals for an apartment, which is a fraction of the purchase price.

“The value of the loan does not cover anything at all. If you buy a land parcel, you will not be able to start building ... There is not in the whole of Riyadh an apartment ... at this price,” said Ahmeb al-Babtain at real estate agency Century 21 Saudi Arabia.

The prices of property and land have surged dramatically, especially after the 2006 stock market crash as funds fled the equity market for property, resulting in widespread speculation in a poorly regulated environment.

Over the 12 months to July alone, the price of land has doubled in Riyadh and in the eastern city of Dammam, according to Abdullah al-Aoufi, Chairman of Yakht al-Khobar For Real Estate Development company.

“Some (developers) develop a small area of a much larger land parcel they have bought before so that they raise all of its value, sell it and abandon the project they started altogether,” Aoufi said.—Reuters

http://www.dawn.com/2008/09/04/ebr18.htm