Tougher Mortgage Rules Spark Plunge In Riyadh Property Sales -JLL

Residential property sales in Saudi Arabia’s capital Riyadh have plunged since the Kingdom introduced tougher mortgage rules last November, research from JLL shows, and the consultancy predicted the restrictions would spur further country-wide declines.

Buyers can now borrow a maximum 70 per cent of a property’s sale price; previously, there were no sector-wide limits. The curbs were announced in 2013 and implemented in November 2014 after the introduction of laws to facilitate mortgage lending.

The restrictions aim to prevent a bubble forming in residential real estate of the kind seen in Dubai several years ago. Authorities want to encourage home ownership and prevent ordinary Saudis from being priced out of the housing market.

But the market’s initial reaction to the restrictions shows how difficult it can be to adjust supply and demand in line with social objectives in Saudi Arabia, which faces a shortage of available land and a rapidly growing population.

The number of house sales in Riyadh between the time the new lending limits were introduced and the end of last month fell 70 per cent from a year earlier, JLL wrote in a report this week. The number of apartment sales dropped 33 per cent.

“Recent changes to mortgage regulations have resulted in a shift in demand away from residential sales to rentals,” Jamil Ghaznawi, national director and country head of JLL Saudi Arabia, said in the report.

“Sales are expected to decrease further (due to) the mortgage laws,” he said in an emailed response to questions. “The laws have affected other parts of Saudi, including Jeddah.”

The government last month announced plans for a new tax on undeveloped urban land, aimed at pushing landowners to develop unused plots and ease the shortage of affordable housing.

But uncertainty over the nature and timing of the tax, which have not been decided, may initially at least also depress property sales, Ghaznawi added.

Prior to the mortgage laws, Saudis could obtain home loans to buy property, but this had to be from the same bank into which their salary was paid, and instalments were deducted from the borrower’s monthly pay packet.

Fayyaz Ahmad, director of JLL’s Riyadh operations, said that in the short term, “access to property will be limited as people are priced out of the market while the market regulates itself, but in the longer term it is expected that people will still have access to property.”

The Saudi central bank “wants to avoid a banking crisis similar to the one in the United States in 2008”, which was triggered by souring house loans, added Ahmad.

Riyadh house sales prices fell two per cent in the first quarter versus the preceding three months, while rents rose two per cent, JLL estimates.

About 5,000 housing units were completed in the first quarter, bringing the city’s total stock to about 976,000, JLL added.