Saudi mortgage law will stabilise housing, banks

The introduction of a mortgage law in Saudi Arabia will improve the housing supply and social stability as well as provide diversification of the banking sector, according to Fitch Ratings.

However these benefits will not be instant because banks will approach the new market with caution.

Saudi Arabia will issue regulations and licenses for mortgages based on the Islamic lease financing model in August.

Mortgage demand is expected to be strong because a growing young population has faced rising rents over the last four years. This has led to a drop in living standards among the lower-income population.

The rent subcomponent of the CPI has risen by 47% in the four years to May 2012, more than twice as fast as overall inflation. Total mortgage lending is a mere 2% of GDP and home ownership is only 30% of the population.

The jump in demand to buy houses now that mortgages will be available may trigger house-price inflation. The rise in house prices will be tempered by planned property developments that will help meet demand. Tight regulation on mortgages as well as a cautious approach by the banks will also help to dampen price rises.

The government is already undertaking an extensive house building programme. Importantly, we expect private-sector property development to increase now that there will be financing available for young Saudis. The government’s Real Estate Development Fund offers subsidised mortgages to purchasers of affordable housing.

What’s more, tight credit limits for personal loans by the Saudi Arabia Monetary Agency show the regulator is unlikely to allow a housing boom to get out of control. Rules for personal loans, including credit cards, cap total monthly payments at one-third of net monthly income. Loan maturities cannot exceed five years.

Most banks are also likely to be cautious in their approach to mortgages because it is unclear exactly how the foreclosure process will work. Furthermore, they are funded through short-term deposits, which limit the amount of long-term lending they will want to undertake. Nonetheless, some banks have already built up their presence in the housing loan market over the last 18 months.

The funding mismatch is not an immediate problem because short-term deposits tend to stay at banks for long periods. But banks are likely to search out longer term funding before building up large mortgage portfolios.

“The new regulation allows for the development of a securitisation market, which could provide much of the financing – if it takes off,” Fitch, added.

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