Saudi housing: A wicked problem?

Saudi housing: A wicked problem?

Julian Roche Chief Economist

Problems no one wants Many public policy problems can be solved without causing other problems to get worse. Even remarkably complex planning processes, such as the transformation of the sewerage system in Singapore many decades ago1, or the construction of the Dubai Metro, can lead to uniformly welcome outcomes across a range of criteria. These include lesser commuting times, improvements in air quality2 and higher urban life expectancy3. Social cost-benefit analysis for such ‘tame’ projects is relatively straightforward provided that quantitative measures can be found for both their financial cost and their social benefits.

By contrast, some problems are ‘wicked’, called so because of their very characteristics as opposed to intentions or outcomes. The characteristics of such problems were described in a classic article way back in 19734. Three, in particular, stand out.

First, proposed solutions help shape the problem itself, which is usually complex and changing. Second, solutions resemble the construction of a Möbius strip— an endlessly turning perspective, with no clear ‘winner’, no ‘quick fix’ and frequently unforeseen consequences. Thirdly, and most characteristically, any attempt to solve the problem from one perspective or in one aspect reveals ‘internally conflicting goals or objectives within the broader wicked problem’5.

The Saudi housing conundrum These three characteristics certainly apply to the problem of developing housing policy for the growing population of Saudi Arabia. Most obviously, policymakers wish to increase the supply of good quality housing for a growing population but to do so threatens the equity value of homeowners in an already stretched mortgage market, especially in Riyadh. Equally obviously, policymakers would like to increase the effective economic demand for existing and future housing stock throughout the price range. However, economic growth is constrained by at least two factors currently: volatile oil prices and the length of time that economic diversification policies will take to increase incomes. Eventually, income taxes will provide further constraints.

Policymakers would like to raise both demand and supply at the same time, but without overloading an already stretched urban transport system, without creating undue risks for homeowners and the banking system, without creating an underclass which can never hope to own property, and without siphoning off productive investment from elsewhere in the economy.

1

Shah, V. (2015) Lee Kuan Yew: The architect of Singapore’s water story. Eco-business.com. 25 March 2015. Available at: https://www.

eco-business.com/news/lee-kuan-yew-the-architect-of-singapores-water-story/ Retrieved 1 March 2020 2

Chen, Y. and Whalley, A. (2012) Green Infrastructure: The Effects of Urban Rail Transit on Air Quality American Economic Journal: 4(1),

58-97.

3

Guo, S. (2019) Can urban rail transit systems alleviate air pollution? Empirical evidence from Beijing. Growth and Change 50(1), 130-144.

4

Rittel, H.W. and Webber, M.W. (1973) Dilemmas in a General Theory of Planning. Policy Sciences 4 (1973), 155-169. Available at:

http://www.sympoetic.net/Managing_Complexity/complexity_files/1973%20Rittel%20and%20Webber%20Wicked%20Problems.pdf Retrieved 29 February 2020.

5

Australian Public Service Commission (2010) Tackling wicked problems: A public policy perspective. Available at: https://www.apsc.

gov.au/tackling-wicked-problems-public-policy-perspective Retrieved 29 February 2020.

2

Saudi housing: A wicked problem?

It is a wicked problem indeed.

In all of this, Saudi Arabia is no different in principle from many other jurisdictions.

Solving the challenge of homelessness in Miami was described as a wicked problem6. The difference is one of scale, and urgency. When critics take the Saudi government to task for failing to achieve results quickly, they should not forget this, even if they often do.

Current policies and their risks The government’s first policy has been to increase supply through new construction.

Both Riyadh, with a planned delivery of around 60,000 new homes in 2020, and Jeddah at 23,000, are witnessing construction proceed at a rate faster than population growth. The Ministry of Housing believes it can itself deliver 100,000 properties in 2020. The need is growing, however, with a requirement for between 1.1–1.5 million new dwellings in the next decade, so government policy is keeping pace—but only just.

Constructing properties is only one half of the problem: the other half is creating sufficient economic demand for them. In that regard, the creation of a tiered Saudi social housing sector with relatively sophisticated criteria for beneficiaries, such as public sector retirees, is a necessary regulatory burden—as with the Public Investment Fund’s public-private partnership projects and the Sakani housing initiative. Government emphasis on low to middle-income housing is clearly still required, but the policy problem remains of how to create effective economic demand at this level.

The second policy is to drive forward home ownership. Nearly half of the 20.7 million population owned their own home in 2017 with the eventual goal of reaching 70% by 2030. But apart from the twin desires of reducing dependence on low or zerointerest loans from the Real Estate Development Fund, and encouraging the private mortgage market, the objective was also to halve the cost of an average home by 2020 to five times the average annual income from 10 times in 2015.

New residential mortgages in Saudi Arabia (SAR billion) 30

28.5

25 20

18.2 15.3

15

13.9 9.7

10 6

5.7

5.7

Q1 2018

Q2 2018

Q3 2018

5 0 Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Source: Saudi Arabian Monetary Authority Mortgages for individuals, financed by banks. Figures do not include amount of interest on financing.

Data compiled on 18 Feb 2020.

6

Kalesnikaite, V., & Garcia-Zamor, J.-C. (2014). The Sustainable Development of Miami: Tackling the Homeless Problem. Current Urban

Studies, 2(3), 188-197. Available at: https://www.scirp.org/pdf/CUS_2014091814034665.pdf Retrieved 29 February 2020

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Saudi housing: A wicked problem?

Success in this goal came at a cost: it is a matter of simple arithmetic that if incomes are not rising, as they have not been over the past five years (anywhere, much), then the only way to achieve this target is by depressing demand so that house prices actually fall. Falling house prices, provided they have an elliptical trajectory, can only benefit first-time buyers. The problem is, success in this direction entails major equity losses for existing homeowners. The usual policy concern in this regard is negative equity. So how many Saudis own homes worth less than their mortgage?

This time round, the answer is: not many. Consider Riyadh, where the population grew by 2.37% in 20197. The United Nations thinks population growth is slowing, although without a census it is hard to be certain. One view puts the number of Saudi households at around 680,000, given an average household size of 6.68 (and falling).

Using a base level of 2014=100, the kingdom’s own residential price index9 would suggest that 2019=82 would be an approximately correct figure.

Mortgages have been granted since 2012, but a real acceleration has only been observed in the past two years. The Saudi Arabian Monetary Authority (SAMA) confirmed that as of Q3 2019, the number of mortgages granted was only 113,603.

Even considering a further acceleration during the last quarter of 2019 and on into 2020, fewer than 20% of Riyadh’s residential stock is mortgaged. Of that, most lending has been after the significant fall in prices following 2014. Loan-to-value maxima have been 90% since 2018, but as the International Monetary Fund observed10, most lending is well below this level.

The conclusion is clear enough and can be explained by making a comparison with the UK. During similar rapid price falls in the past in the UK, more than a million homes were in negative equity. The problem remains acute to the point where specialised consultancies exist to solve individual homeowners’ problems.11 By comparison, in Riyadh the number of properties similarly affected in Riyadh is two orders of magnitude less.

Banks’ exposure is also mitigated by the real estate loan guarantee programme, covering a quarter of mortgage payments, and the mortgage refinancing programme, which serves to reduce the quantity of mortgages on their books. It is not surprising that, for the time being at least, rating agencies are relatively sanguine about Saudi banks, at least by comparison to mortgage lenders elsewhere12, even if mortgage growth has been driving lending and from the inside, the mortgage market looks frenetic and risky. The Saudi Government has been very fortunate that oil prices fell before the mortgage market really took hold in the country, and is relatively well-placed to develop despite continued low oil prices.

7

Macrotrends (2020) Riyadh, Saudi Arabia Population 1950-2020. Available at: https://www.macrotrends.net/cities/22432/riyadh/

population Retrieved 1 March 2020 8

World Population Review (2020) Riyadh Population 2020. Available at: http://worldpopulationreview.com/world-cities/riyadh-

population/ Retrieved 1 March 2020 9

Kingdom of Saudi Arabia (2020) Real Estate Price Index. Available at: https://www.stats.gov.sa/en/843 Retrieved 1 March 2020

10

IMF (2019) IMF Executive Board Concludes 2019 Article IV Consultation with Saudi Arabia. Available at: https://www.imf.org/en/News/

Articles/2019/07/18/pr19287-saudi-arabia-imf-executive-board-concludes-2019-article-iv-consultation-with-saudi-arabia Retrieved 1 March 2020 11

Negative Equity (2020) Trapped by Debt? Available at https://www.negativeequityuk.com/ Retrieved 1 March 2020

12

S&P (2019) Saudi Banking Sector 2020 Outlook: Risks Contained Despite Higher Credit Growth. Available at: https://www.spglobal.com/

ratings/en/research/articles/191117-saudi-banking-sector-2020-outlook-risks-contained-despite-higher-credit-growth-11228205 Retrieved 1 March 2020

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Saudi housing: A wicked problem?

Conclusion: The next few years are crucial Wicked problems by definition can never be solved, unless the frame of reference changes so substantially that they fade away: London no longer suffers from choking, sooty fogs, nor are the streets covered with mud13. Until such change happens, policymakers have little room for manoeuvre; it is as much as they can do to contain the problem from breaking out too severely in any one direction.

Innovative construction methodologies built into affordable housing contracts, such as the 8,000 homes to be delivered by Katerra, are a potentially game-changing solution for Saudi Arabia as elsewhere.

Even more if they could be combined with a housing affordability model based on splitting land ownership from usufruct of cheap-tobuild physical property.

However, solutions of that kind will take time, so realistically, all the housing targets of Vision 2030 may be met beyond the ambitious timescale set out in the plan. For example, prices, even though they have fallen in Riyadh and other major cities, are likely to land smoothly and therefore remain stubbornly above the 5x salary goal for some time.

Yet, homeowners will have reason to be pleased. The only significant risk is that banks’ wholesale interest rates must remain at current levels, or at least not go over the circa 6% rate for fixed interest residential loans. One can still expect continued achievements with a rise in home ownership and a compound annual growth rate in the mortgage market in line with economic growth.

Even if the targets of Vision 2030 take longer than originally anticipated, thanks to macroeconomics as well as conflicting policy objectives, the largest real estate market segment of the Middle East has finally begun to live up to its promise. The next generation of investors will have ample reason to thank the authors of Vision 2030.

13

‘Dirty Old London’: A History of The Victorians’ Infamous Filth. 12 March 2015. Available at: https://www.npr.

org/2015/03/12/392332431/dirty-old-london-a-history-of-the-victorians-infamous-filth Retrieved 29 February 2020

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Saudi housing: A wicked problem?

DUBAI

ABU DHABI

SHARJAH

MUSCAT

2205 Marina Plaza Dubai Marina P.O. Box 118624 Dubai United Arab Emirates T: +971 4 453 9525

605 West Tower, Abu Dhabi Mall Tourist Club Area P.O. Box 126609 Abu Dhabi United Arab Emirates T: +971 2 448 4677

1801 Sarh Al Emarat Tower Buhaira Corniche Street P.O. Box 38583 Sharjah United Arab Emirates T: +971 6 715 0444

Villa 836, Way 3012 Al Sarooj P.O. Box 3438 Muscat Sultanate of Oman T: +968 24 694 150

Disclaimer: The information and analysis contained in this report is based on information from a variety of sources generally regarded to be reliable, and assumptions which are considered reasonable, and which was current at the time of undertaking market research, but no representation is made as to their accuracy or completeness. We reserve the right to vary our methodology and to edit or discontinue the indices at any time, for regulatory or other reasons.

The report and analysis do not purport to represent a formal valuation of any property interest and must not be construed as such. Such analyses, including forward-looking statements are opinions and estimates only, and are based on a wide range of variables which may not be capable of being determined with accuracy. Variation in any one of these indicators can have a material impact on the analysis and we draw your attention to this. Cavendish Maxwell and Property Monitor do not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this report.

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