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The proposed mortgage law is the keystone of a significant overhaul of Saudi's home finance market, which would result in tighter regulation across the entire industry. Mortgages will be registered, eviction orders emboldened, and finance houses reassured that under law, they will be able to reclaim debts in the event of a mortgage holder defaulting on his payments. It is hoped that this will encourage banks to lend by making it easier to take action when a borrower doesn't pay - presently lenders are often dissuaded by the prospect of lengthy court disputes.
Change needed in Saudi Arabia real estate market
Change is greatly needed. Saudi is the most populous nation in the Gulf, its population having grown by 20% since 2002, and of the country's current indigenous population of 18.5 million, 47% are aged 18 or below. It is also desperately short of homes for lower- and middle-income families: according to recent figures from Credit Suisse Group AG, demand for housing in Saudi will reach around two million units in the next three years.
"Saudi has a big indigenous population, and it's a rapidly growing population with a lot of youngsters," says Andrew Charlesworth, head of Capital Markets at Jones Lang LaSalle (JLL). "It's the only country in the Gulf where mortgages are not available, and so there's tremendous pent-up demand, among Saudi nationals in particular, to get on the housing ladder and buy their own properties.
"Many are renting and a lot are staying in extended family homes with parents, until they can get enough equity together to buy a house with cash," he continues. "They are raising money themselves, and borrowing from each other, but clearly any mature economy needs to have some sort of mortgage facility."
Over half of Saudi population rent rather than buy
Currently, more than 55% of Saudi residents rent due to the high prices of land and housing, which have become unaffordable for low- to middle-income families without mortgage lending as an option for home ownership. The shortage of properties has caused residential prices in Jeddah and Riyadh to soar by as much as 30%, CB Richard Ellis said in a Q4 2010 study.
"If you rent then you're relying on either the government sector or the private sector to provide properties," says Charlesworth "But are governments really in a position to be able to continue to fork out money to put up nationals on an ongoing basis? That might be fine in smaller markets with smaller populations, but in Saudi it's in the government's interest to facilitate a mortgage law.
"Otherwise it will come back to the government to provide [accommodation], and it's unrealistic to rely on that forever - it's a huge drain on resources. So it seems natural that the government would want to pass that burden to private sector providers."
At the same time, he argues, the private sector is lacking incentives to build for the rental market. Developers face building tens of thousands of units, for which they need to raise finance, before they hold on to the properties long-term - a prospect which is putting off developers, and so narrowing the number of firms interested in building much-needed homes.
"For the private sector, as things stand now, is it realistic or desirable to keep building homes for rental? We're left with a housing market that isn't really satisfying what people want," adds Charlesworth.
Government may have stalled on bill
While there has been no official word on when the law might be passed, other than oft-broken promises that its ratification was imminent, there is little doubt as to the main sticking point for policymakers.
