JEDDAH — The Saudi housing market continues to expand on the back of high population growth and increasing availability of financing alternatives. Other key determinants include the increasing kingdom's GDP, growing Saudi labor force and rising personal income, which all have a direct impact on the housing market. This trend will continue as the Saudi economy is expected to grow by 3.9 percent through 2012, NCB Economist report on the Saudi Housing Sector said Sunday. Key regulatory initiatives such as the newly passed mortgage law, once implemented, will certainly stimulate the demand for housing in the medium to long-term. The Saudi housing market is already experiencing a supply/demand imbalance and this trend is expected to continue as the supply of houses will lag behind demand. Meanwhile, the lack of affordable housing continues to be a challenging issue, especially the limited ownership of modern homes (villa) by Saudis. In addition, the artificially high prices of land plots, which are increasingly sought after in the Kingdom as a long-term investment option by high net worth Saudis, are accessibly limited to Saudi citizens and home developers. The housing market is crucial to the development and advancement of the Saudi Arabian economy. While several constraints exist, the potential for growth is plentiful. The demand for housing, especially affordable units, continues to grow at a rapid pace. The continued migration to the Kingdom's three main regions of Makkah, Riyadh and Eastern Province has been exerting pressure on property developers and banks to provide the necesSRy facilities to accommodate such shifts. In addition, the younger age demographic, which represents the largest segment of the population, besides generating additional demand as they enter the marrying age, are gradually breaking from the extended family life style. A change in cultural norms caused a drop in the average household size. Thus, the average Saudi household size will decrease to 5.28 persons per occupied housing unit by 2020.
Total housing stock is expected to expand from 4.6 million units in 2010 by 2.4 million units during the next 10 years, with annual demand rising from 195,000 in 2011 to 264,000 units by 2020. The lack of affordable housing continues to be a challenging issue, which has limited home ownership for Saudis, as renters account for the largest share of the population at nearly 60 percent. Assuming historical growth rates, the gross fixed capital formation in residential construction will amount to SR650 billion through 2020, the report said. After factoring in the allocation of SR250 billion, total expenditures will reach SR900 billion, still short by SR400 billion needed to meet the SR1.3 trillion in housing expenditures. The report forecast that residential bank lending will reach SR60 billion in 2012. Total population in the Kingdom is projected to reach 37 million by 2020. Assuming the average Saudi household size maintains its declining trend thereby reaching 5.28 persons per housing unit, housing stock is expected to amount to 7,080 million units by 2020. Accordingly, total housing stock in the Saudi housing market is expected to expand by 2.4 million units during the next 10 years, with annual demand rising from 195,000 units in 2011 to 264,000 units by 2020. The public and private sectors are expected to contribute to the growth in investments within the housing sector. Based on market sources for the average housing unit cost of around SR540,000, total investment required will amount to SR1.3 trillion, in order develop 2.4 million new housing units between 2011-2020.
This represents an average outlay of SR130 billion per annum. One way to measure the current level of investments in the housing sector on a macro level is through gauging the value of gross fixed capital formation (GFCF) expenditures in residential construction. The level of residential expenditures reached nearly SR43 billion in 2011. Accordingly, total GFCF in residential for the period 2011 to 2020 is projected to amount to SR650 billion.
This number, however, falls short of the total investment needed estimated at SR1.3 trillion, even after accounting for the recent allocation by the government of SR250 billion for the housing sector.
Evidently, further investment will be required by the private and public sectors in order to close this investment gap of nearly SR400 billion to meet anticipated housing demand. This gap will surely be reduced once the recently approved mortgage law is fully enacted and more real estate financing companies besides Saudi banks along with licensed foreign banks expand their financing options. In addition, this will contribute to partially restore the demand supply imbalance of the housing market and ultimately moderate the land and property prices from their artificially high levels. Demand for housing across the kingdom has centered around the three major regions, which include Makkah, Riyadh and the Eastern province. The housing concentration in these three regions are largely based on population count, housing development and available financing.
Approximately 66 percent of the 27.1 residents are clustered in those three regions. Furthermore, the number of occupied homes in those same regions represent 67 percent of the total in the Kingdom. Historically, Saudi household sizes have been commonly large, thereby accommodating extended families. Although this practice is somewhat still in use today, cultural changes coupled with rising per capita income has caused a desire to shift towards breaking away from the extended family system.
Meanwhile, the average household size in Saudi Arabia has been noticeably shrinking over the years. — SG
