Mortgage market in Saudi Arabia is worth SAR 100 billion

Naif Abdulmohsin Al-Baz, CEO of Deutsche Gulf Finance talks about the outlook for the mortgage market in Saudi Arabia.

There is a lot of space for mortgages in Saudi Arabia; it is a young market and home finance only accounts for 5% of total bank credit. What is the overall environment for mortgages in Saudi Arabia?

According to the latest SAMA records the total mortgage size in Saudi Arabia is more than 100 billion riyals, coming mainly from the commercial banks. This represents only the official figures excluding Real Estate Development Fund (REDF) financing. If you compare this number to the consumer finance and other corporate finance products, it is very small. The reason is that the population of Saudi Arabia is viewed as a young population and mortgages are now something that is becoming a necessity for people in Saudi Arabia because of their gradual ageing.

If you think about the average age of the population five years ago, it was younger than it is today. As we go into the next five years you will find that the average age of the population has advanced and the need for home financing will increase. This represents an opportunity for local banks and financing companies for mortgage financing. All of these economic incentives make the mortgage financing and home residential financing business attractive in Saudi Arabia, supported by a good average GDP.

There is a lot of development in this sector, for example the 30% down payment and also the new mortgage law. All of these developments have slowed down the sector, and the reason SAMA has done this is because they don’t want hot money, they want to be conservative and prudent yet in the developed market the down payment is about 10%. In your opinion, what do you think about these developments? Should SAMA reduce this down payment?

Because of the mortgage crisis in 2008 and what happened mainly in the US, SAMA saw that it was important to regulate the industry and avoid having over inflated prices that can cause defaults within the mortgage sector. It was very important for SAMA to implement the 30% down payment requirement for mortgage financing to avoid such bubbles in the future.

 It is also becoming a trend within the developed economies for regulators to impose a minimum down payment with respect to mortgage financing in order to avoid defaults in the future and having issues with respect to down payments and over inflated housing prices. In Saudi Arabia for example it is good to regulate this business with the implementation and introduction of the 30% down payment.

At the beginning it will cause some slow down with respect to the growth of the mortgage sector, however over the medium to long term this will correct itself and we will see more supply in the market that will match the demand and affordability of the clients in Saudi Arabia. Over the long term we should have a stabilised economy backed by a healthy mortgage environment. What SAMA did by introducing the 30% down payment was the right decision to avoid any issues in the future.