Mortgage lending in Saudi Arabia, a crucial component of the kingdom’s private sector bank credit, hit a record low in April 2023 due to rising interest rates that have discouraged potential home buyers. According to data released by the Saudi Central Bank (SAMA) on Sunday, residential mortgage loans provided by commercial banks dropped to 4.1 billion riyals ($1.09 billion) in April, compared to 7.25 billion riyals in March.
Over the past decade, mortgage lending in Saudi Arabia has experienced substantial growth, often surpassing corporate lending, thanks to regulatory changes. The sector gained momentum in 2016 when the government launched the Vision 2030 program, aiming to raise home ownership to 70%. As a result of this initiative, home ownership increased from 47% in 2017 to 67% in 2022, as reported by real estate consultancy Knight Frank.
However, the latest data from Riyadh-based brokerage Al Rajhi Capital reveals that April recorded the lowest level of mortgage origination since January 2019, raising concerns about the near-term growth of the mortgage market. The brokerage noted that changes in the subsidy program, along with high real estate prices and expectations of falling interest rates, have weighed on mortgage demand and delayed purchasing decisions.
Al Rajhi Capital estimates total mortgages to reach 6.8 billion riyals in 2023, with an average origination of approximately 6.7 billion riyals year-to-date. The Saudi Central Bank’s data also showed a decline in the number of mortgage contracts signed, dropping from 9,526 in March to 5,270 in April.
In response to the economic climate, SAMA has been raising key interest rates over the past year, aligning with moves by the US Federal Reserve since the Saudi riyal is pegged to the dollar. The latest increase marked the fifth hike this year, with the central bank raising its repo and reverse repo rates by 75 basis points (bps) to 3.75% and 3.25% respectively.
Knight Frank’s recent report highlights a continued decline in the volume of residential transactions in Saudi Arabia, with a nearly 57% decrease in Riyadh and a 67% decrease in Jeddah on an annualized basis as of the end of Q1. The report attributes this notable decline to the cyclical nature of the market, primarily driven by the substantial rise in capital values over the past 12 to 18 months. Additionally, the increase in mortgage rates impacting ownership costs and the reduction in subsidies, particularly affecting lower-income segments, have contributed to the diminished enthusiasm for home purchases, according to Harmen De Jong, a partner at Knight Frank.
Mortgage lending in Saudi Arabia has reached a new low as interest rate hikes deter potential home buyers. The impact of changes in the subsidy program, high real estate prices, and expectations of falling interest rates has resulted in decreased mortgage demand and delayed buying decisions. As the market experiences a decline in residential transactions, the implications for the housing sector and overall economic outlook remain a point of concern.
