New residential mortgage financing granted to individuals in Saudi Arabia recorded a significant decline during the third quarter of 2023, with an annual decrease of 11.7% and a quarterly decrease of 4.7%. This development, revealed in the Real Estate Sector Performance Report issued by the General Authority for Real Estate, reflects a new phase the market is undergoing, influenced by several factors, most notably the rise in borrowing costs and the move towards a balance between supply and demand.
General context: From the Vision 2030 boom to the maturity stage
The Saudi real estate sector has witnessed unprecedented growth in recent years, driven primarily by the goals of Vision 2030 and the Sakani housing program, which aimed to increase homeownership rates among citizens. These policies facilitated access to mortgage loans and injected substantial liquidity into the market, leading to rapid growth in financing volume. However, recent developments indicate that the market is entering a phase of maturation and correction, with fundamental economic factors, such as interest rates and purchasing power, becoming the main drivers of demand rather than government subsidies and excessive liquidity.
Analysis of the performance of different real estate sectors
The report showed a clear disparity in the performance of different sectors of the real estate market, indicating a change in the behavior of buyers and investors.
Financing for villas and residential units
The decline in consumer spending has had a direct impact on higher-cost real estate products. Financing for villas fell by 4.2% year-on-year, highlighting the sector's sensitivity to rising borrowing costs. Buyers appear to be shifting towards smaller, more affordable housing options, such as apartments. Despite the year-on-year decline, residential market activity rebounded quarter-on-quarter with a 12.9% increase in the number of transactions, suggesting that underlying demand remains but is shifting its priorities.
Commercial and agricultural sector
In contrast, the commercial market saw an increase in the number of transactions, but with a significant decline in their total value of approximately 49.6% quarter-on-quarter. This suggests that investors currently prefer smaller, more liquid deals, perhaps to avoid the risks associated with large investments in the current economic climate. Meanwhile, the agricultural sector continued its sharp decline in both the number and value of transactions, reflecting its diminishing investment appeal.
Impact of monetary policy and new legislation
This slowdown cannot be separated from the monetary policy pursued by the Saudi Central Bank (SAMA), which aligns with global trends of raising interest rates to curb inflation. This increase in borrowing costs has made obtaining mortgage financing more expensive for individuals, leading to a slowdown in demand. Simultaneously, the market is adapting to new regulations aimed at increasing transparency and organization. This is reflected in the notable quarterly recovery in license issuance and brokerage activities, with the number of licenses issued rising by 19.8% and brokerage contracts reaching 135,983, an increase of 23.7%, with activity heavily concentrated in major cities such as Riyadh, Mecca, and the Eastern Province.
An overview of the rental and existing loan market
Market effects extended to the rental sector, which experienced significant price pressures. Despite a quarterly increase in the number of residential rental transactions, their total value declined by 21.2%. The decline was even more pronounced in commercial rentals, which saw a 53.6% year-on-year decrease. This reflects a market trend towards lower-cost leases, driven by pressure on tenants' purchasing power. Despite the current slowdown, the sector maintains a strong funding base, with outstanding mortgage loans exceeding SAR 966.8 billion, underscoring its strategic importance to the national economy.
