Mortgages have become a big business in Saudi Arabia. As a result, bank loans to home buyers rose to approximately one-fifth of total credit, whereas it was less than 1% in 2016. Sheikh Yousef Al Shelash, the chairman of Saudi Home Loans (aka SHL), has been one of the key players in bringing the concept of home mortgages to Saudi Arabia.
Saudi Home Loans was one of the first agencies in Saudi Arabia created to assist Saudi nationals in mortgaging the purchase of their homes. At the time, it brought a revolutionary change.
Most people rented or lived with their families because they had to save up to purchase a house outright. Some even had to save money to buy the land and spend years acquiring the funds necessary to build on it. SHL changed all that. Now, Saudi nationals can mortgage a home through SHL for anywhere from 15 to 30 years and move in immediately. This has helped so many people to have their first home.
An exciting result of the advent of home mortgages is the boost in urbanisation. A Saudi Home Loans mortgage allows people the flexibility to live where they want, and many have left the suburbs for the cities, where they may not have been able to afford real estate before.
Housing Is a Hot Commodity in the Kingdom of Saudi Arabia
Construction in Saudi Arabia continues to grow. During Q3 2022, contracts worth $6.7 billion were inked. Clearly, the region is undergoing a housing and mortgage transformation, boosted by the government’s push to increase homeownership to overhaul the region’s economy and ultraconservative society. “It makes sense even in a more challenging economic environment to keep prioritising housing,” stated Karen Young, the economics and energy program director at the Middle East Institute think tank.
The growth of mortgages has been staggering and so rapid that it’s sparked concerns that the bubble will burst. However, according to James Swanston, a Middle East economist, the rise in lending is not a cause for concern. “The health of the Saudi banking sector is becoming more closely linked to the state of the property market and household incomes than ever before,” stated Swanston. He explained that the prices so far haven’t accelerated to reflect the growth and noted that Saudi bank balance sheets are the most secure in the Gulf region. However, the increase in mortgage lending denotes a transition for Saudi banks that could leave them vulnerable if the housing market dips.
Swanston also pointed out that the war in Ukraine could cause faster growth for the Gulf countries. He stated, “The spillovers from the war in Ukraine will further drive divergence in economic growth across the Middle East and North Africa. The Gulf economies stand to benefit as oil production is likely to be raised more quickly. Combined with higher oil prices, it will probably prompt some governments to loosen fiscal policy. However, higher commodity prices outside the Gulf will push inflation, and policymakers will probably have to step up fiscal consolidation efforts.”
Regulation Was a Major Challenge
Saudi Home Loans became a publicly traded company in 2022. However, there was no home loan mortgage market in the region when it was established in 2007. There needed to be a proper regulatory framework in Saudi for home mortgages. They evolved with regulation. When SHL started, regulation was just starting up. People needed to understand they could take a loan for 25 years.
At the same time, the entire mortgage loan was still not established in the region, and interested home buyers didn’t understand how it would work. So the main challenge was evolving with the evolution of the regulation. When a person takes a loan, if they don’t pay the loan, the house is foreclosed, and they end up losing their investment. This was not there.
“Over the past 15 years, the region has developed and established a fully developed mortgage market. It is similar to the United States in that it has all of these mortgage lenders, the banks, and the nonbanks,” explained Al Shelash.
And just like the United States has the Fannie Maes and the Freddie Macs, here we have refinancing companies that belong to the government who are also buying mortgages to continue providing liquidity to the market — although none of that was there when Saudi Home Loans started. The industry needed to evolve with regulation and convince many banking institutions to fund these mortgages.
The World Bank helped to legitimise Saudi Home Loans in the eyes of the public. Convincing the World Bank to be part of that organisation was a huge step because once so many banking institutions saw the International Finance Corporation of the World Bank getting involved in that project, it provided a lot of trust to so many of the banking institutions. One of the first funding came from the World Bank from the IFC. Then the other banking institutions followed.
Regulations to allow mortgages in Saudi Arabia were passed in 2012. As a result, homeownership has advanced to over 60%, which is nearly on level with the United Kingdom and the United States. According to housing ministry figures, while mortgages were 0% a decade ago, today, it has risen to a $124 billion industry with approximately 870,000 contracts signed.
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