Amid critical shortage of houses for the rapidly growing population in the six Gulf Cooperation Council (GCC) countries, mortgages are seen as indispensable for broadening access to housing, which historically, acquisition depended heavily on personal/family resources as well as subsidized loans from special government funds. In its latest GCC Economic Review released Tuesday, the National Commercial Bank (NCB) said the Gulf countries should develop a comprehensive institutional infrastructure for efficient mortgage markets. It said “modern mortgage markets are critical for meeting the growing housing needs of the Gulf region.” “Getting mortgages right is one of the most important challenges facing the GCC region… with the average family size furthermore experiencing a secular decline, access to adequate and affordable housing has emerged as an increasingly pressing policy priority,” it said. “Yet the wealth and income distribution in the region has significantly limited the availability of owner-occupied housing as funding solutions have tended to rely heavily on personal savings and support from family and friends.” NCB cited a recent study by the International Monetary Fund, which estimated that a 10 percent increase in household credit is on average associated with a six percent increase in house prices. “In spite of the magnitude of the demographic challenges, mortgage lending in the GCC has to date remained very modest by international standards. Even after rapid growth in recent years, the overall industry is still estimated to total significantly less than $100 billion in terms of actual disbursals,” it said. “The development of mortgages in the GCC has in part been linked to addressing cultural and religious sensibilities, especially in the area of foreclosure, which are relatively recent phenomenon in the region,” it said. “Historically, the lack of effective foreclosure enforcement appears to have been a source of delinquency with for instance some of the government lenders recording relatively high volumes of loans in arrears.” NCB noted that bank credit for home purchases has been limited while government funding is significantly rationed. It said this has prompted property developers in the region to veer towards the high end of the market as well as commercial real estate where the reliance on credit is far less. In some instances, it said, such tendencies have been further amplified by more stringent regulations applied to residential mortgages. “A properly structured mortgage system can help easing these constraints by boosting the availability of funding to the middle segment of the wealth/income distribution, thereby incentivizing developers to build properties that meet the expectations of this sizeable group of buyers,” it said. “As borrowers are able to spread their payments over a longer period, the financial burden of a home purchase becomes easier to shoulder. More problematically, the increased availability of credit can push up property prices.” The report noted that though defaults are among the main risks faced by mortgage lenders, their probability can be reduced by a careful vetting of borrowers and the use of insurance policies. It further said that secondary mortgage markets can play an important role in improving access to mortgages by enabling lenders to move their mortgage assets off their books. In the absence of secondary markets, portfolio lenders are required to hold their mortgages to maturity. This creates additional problems of maturity mismatches, especially for banks that finance mortgages through deposits that tend to be shorter in duration than the mortgage loans themselves. By contrast, many institutional investors seek long-term, secure investments and properly structured and rated MBS are a very attractive instrument for them. At the same time, they are often liquid instruments which can be disposed of quickly when need be. NCB noted that private sector mortgages have to varying degrees eclipsed – and in some cases capitalized on – older government housing banks, which have traditionally served as the primary source of subsidized real estate loans. It listed Real Estate Development Fund in Saudi Arabia, the Kuwaiti Savings and Credit Bank, and the Bahraini Eskan Bank. “In spite of the impressive progress, the development of the GCC mortgage markets continues to be held back by a number of regulatory and institutional hurdles. For instance, the availability of reliable credit data remains limited, although Saudi Arabia's Simah credit bureau, launched in 2004, is an important step in the right direction,” the study said. It noted that Bahrain has been collecting housing credit data since 2005 and the UAE to an extent since 2006. Property registers and unequivocal title deeds remain generally work in progress but are increasingly recognized as a priority. It said Kuwait's law on real estate registration dates from 1959 while Saudi Arabia first launched a system for the physical identification of properties in 1984 and a Cadastre Law was adopted in 2003.
