High interest, residential unit prices impact mortgage demand in Saudi Arabia: Analysts

The real estate market has witnessed lackluster activity recently, especially at the level of retail mortgages, which recorded successive sharp declines over the last months, hitting its lowest level since December 2018 in April 2023.

Analysts and specialists surveyed by Argaam attributed this to several reasons, including high interest rates, a rise in real estate housing prices, legislative policies, and slow procedures with financing agencies, in addition to the waiting lists that led to a decline in retail mortgages in the Kingdom.

Analysts added that the prices of villas and apartments are very high, which will make some owners face difficulty in marketing, despite the varying prices in some neighborhoods and residential areas.

Mortgage sales down 44%

Muhammad Makhashin, mortgage consultant and member of the Arab Real Estate Academy, said the decline in mortgage activities in Saudi Arabia is due to high interest rates by financing agencies, low housing subsidies, and a significant increase in real estate prices, in addition to pumping projects at good locations by the Ministry of Municipal, Rural Affairs, and Housing at reasonable prices.

He added that mortgage sales fell by 30-44% over the past two months, but this did not affect some private projects or special agreements between some financing agencies and quasi-governmental bodies.

Meanwhile, Khaled Al-Mobid, CEO of Menassat Realty, said the decline in retail mortgages was expectedly due to the significant increase in interest rates during the past year and a half, in addition to high real estate housing prices due to inflation, which led to a reduction in the target segment.

Al-Mobid indicated that high interest rates contributed to increasing the annual installment of mortgage loans for beneficiaries, as well as the value of property after financing. Accordingly, the monthly income became insufficient to buy homes via financing.

The inflation of residential unit prices also led to a decrease in the size of the bankable segment, Al-Mobid noted.

On the other hand, Ibrahim Al-Sahn, a specialist in real estate financing and investment, attributed this to the new support policy by the Ministry of Housing as well as the long or slow procedures with the financing agencies. Accordingly, the real estate fund has an accumulated waiting list of mortgage seekers. This impacted the implementation of the mortgage process, as the procedures with financing agencies took longer than before.

Al-Sahn noted that the interest-rate hike led to the reluctance of individuals to apply for mortgages. In addition, the strictness of policies and legislation by banks and the Real Estate Development Fund (REDF) greatly affected the interest rate hike.

Meter price reaches SAR 4,500, no development in white lands

Makhashin said the prices of villas and apartments are very high in some residential neighborhoods, but they are reasonable in others, with the price per square meter ranging between SAR 3,000 and SAR 4,500.

Al-Mobid said the prices of villas and apartments increased significantly, pointing out that real estate owners will gradually face difficulty in marketing, especially amid the interest-rate hike.

Meanwhile, Al-Sahn pointed out that the prices of apartments and residential villas may be affected if the decline continues for the next year. However, there is an opportunity for negotiation to reduce the price by 5% for those who can purchase residential villas, as the apartments witness robust demand, while the alternative is to rent them with good returns of up to 8%.

He added that the white land owners are keen to hold their plots currently, but they may be impacted, if the decline continues.

On the other hand, Al-Sahn said prices will not easily decline as several owners believe that Riyadh is facing a robust real estate boom and would also witness a strong momentum, noting that this lackluster activity would not last for a long time.

When will the mortgage market see demand recover?

Makhashin said the mortgage market would witness a demand recovery in late July as the potential agreements with some financing companies would result in more offers.

Al-Mobid said demand for retail mortgages will recover on the potential decline in interest rates and offer of low-priced residential units as announced previously by the Ministry of Housing.

Meanwhile, Al-Sahn said the momentum will further increase due to the potential fall in interest rates in early 2024, as well as the offering of new mortgage products by some banks and the announcement of the Riyadh Strategy in Q4 2022. He indicated that high demand by investors in Riyadh and giant projects will help the recovery of the real estate market.