The demand for residential real estate in Saudi Arabia is fueled by a growing and predominantly young population. According to the Oxford Business Group, 70% of the Saudi Arabia’s population is under 30 years old and 45% is under 15, and this young population will boost the demand for houses and apartments in the upcoming years. Samba Financial Group economists estimated that 2.62 million homes will have to be built by 2020 to keep up with the growing demand.
These facts indicate that a large percent of the population should be actively buying houses since most people would prefer to own a house rather than pay rent. Surprisingly, only one in five Saudis owns their home due to the absence of a clear mortgage law because, according to the Saudi government, mortgages do not comply with sharia. On the other hand, some economic experts say that mortgages without interest payments do not oppose Islamic values. Nevertheless, the government banned banks from giving mortgage loans. Without a clear mortgage law, bank borrowing remained very low and mortgage housing finance in the country represented only 2% of the 2007 GDP.
In July 2008, the Shura Council finally drafted a mortgage law, which was passed to the Council of Ministers for final approval. It is expected that the law will be issued by year’s end. It is comprised of four components: a system to monitor financing companies, a real estate financing system, a lease financing system and a real estate mortgage system.
The law was highly criticized. Abdul Rahman Al-Azmil, a Shura member and industrialist, was quoted saying that the law would not benefit 85% of Saudis whose monthly income is below SR5,000 ($1,333). He added that the law would mostly benefit “large real estate firms, large real estate investors, large financial institutions and the middle class.” Additionally, the mortgage law does not solve some cultural issues like the actions that should be taken in case someone defaults, since throwing people out of their houses is against sharia, and financing off-plan sales is also not addressed in the law.
Though the mortgage law is not yet approved and the market rules are still unclear, banks and mortgage finance companies, as well as real estate finance companies, have been active in providing sharia-compliant financing, be it through murabaha, whereby the bank purchases the house and resells it to the customer at a higher price in monthly installments, or ijara, a kind of leasing, where the bank buys and resells the house to the customer at the same price on installments plus an extra monthly amount as rent. Al Rajhi Bank launched its program for private and commercial properties in May 2007, and Dar Al-Arkan Real Estate Development Company, one of the largest real estate developers, initiated a mortgage finance joint venture with Kingdom Installment Co. (KIC), Arab National Bank and the International Finance Corporation (IFC).
Even though one of the mortgage law’s purposes is to increase the demand for houses, this huge increase in the demand for funds might overwhelm the real estate sector in the coming years. More analysis and forecasting is needed and banks will have to find new sources of financing for mortgages in order to meet demand and avoid pushing up inflation or prompting a real estate crisis.
