Analysis - Abdul Hamid Al-Omari
The latest real estate indicators issued by the Ministry of Justice, the end of the local real estate market performance during the first eight months of this year, showed an annual decline in total transaction value of 35.8 per cent, compared with the same period last year.
This is stabilizing the total value of real estate transactions at the end of the period at the level of 87.9 billion riyals, compared to its recorded level during the same period last year at the level of 137.0 billion riyals.
The decline came at a higher rate than the value of transactions in the commercial sector, which recorded an annual decline of 46.0 percent, that to reach SR 25.4 billion at the end of the period compared to SR 47.0 billion recorded at the end of the same period last year. The value of deals in the residential sector decreased by 30.5 per cent annually, and stabilized at the end of the period at 62.6 billion riyals, compared with about 90.1 billion riyals registered at the end of the same period last year.
According to real estate indicators issued by the Ministry of Justice, a comparison of the performance of the local real estate market during the first eight months of this year with the same period of peak year 2014 record a decline in the total value of real estate transactions that reached 70.6 per cent, which total value of real estate transactions during the same period of 2014 to about 299.4 billion riyals.
It is recording the value of the local real estate market transactions with a current performance of heavy losses for the fourth year in a row. It reached more than 211.5 billion riyals. The total losses for the first eight months of each of the last four years are as follows: a loss of more than 58.9 billion riyals for the same period of 2015 compared to the previous year; a loss of about 47.4 billion riyals for the same period of 2016 compared to the previous year; a loss of more than 56.1 billion riyals for the same period of 2017 compared to the previous year; and the loss of more than 49.1 billion riyals for the same period of this year compared to the previous year.
Mortgage growth slowed to its lowest growth rate in its history
The latest mortgage data (banks, financing institutions) issued by the Saudi Arabian Monetary Agency in its latest cash bulletin "July 2018" showed that its quarterly growth reached the lowest rate since the beginning of those loans, with an annual growth rate of 2.7 percent, stable at 232 billion riyals by the middle of this year, compared with 13.0 percent for the same period last year.
The slowdown in the growth of mortgage loans disbursed by banks and financial institutions was due to a decline in the growth of mortgage loans to companies at an annual rate of -8.6 percent, from SAR 99.0 billion at the end of last year to SR 90.5 billion by the end of this year. On the other hand, the growth rate of mortgage loans for individuals for the same period increased by 11.5 per cent to settle at 141.6 billion riyals by the end of the year.
With the introduction of the new principles of responsible finance, the pressure on mortgage growth is expected to increase, particularly in terms of individuals. The impact will begin to emerge at the end of the fourth quarter of this year and the subsequent periods, which will have a significant impact on the performance of the real estate market. More pressure is dampening the inflated price of real estate assets, especially that the application of these principles comes during the current period, which is witnessing the modest growth rates of mortgages at the lowest rates historically.
A comparison of the current period of implementation of the new financing principles, with the introduction of mortgage finance systems by the end of 2014, shows a large part of the outlook for the future of this type of financing. Mortgage loans from the end of 2014 saw a significant decline in their annual growth, which had risen to over 47 per cent in that period, and rapidly fell in less than a year to less than 10 per cent on an annual basis, and then fell to 5 to 6 per cent in the second year, as well as the current period to rates below 3 per cent.
This is in line with the necessary precautions by SAMA and the finance sector towards the current decline in the inflated real estate prices of various types and the prospects for continuation in the coming years as a result of the current reforms being implemented on the real estate market, such hedging by the SAMA will have a significant impact on both the financial sector and the community, from the expected impacts of the correction of inflated real estate prices.
Analysis of the low value of deals and prices
The record decline in local real estate market activity, as compared to its performance over the past years since 2014, refers to many adverse economic and financial factors, in addition to the positive effects of the structural reforms implemented by the Kingdom to solve and address the distortions inherent in the real estate market, whose priorities are to reduce the forms of monopoly and speculation, and the continuous work to stop the negative control of the real estate market transactions.
After decades of long past, during which played a major role in the rise of the standard prices of land and real estate, it contributed to a very large extent to the housing crisis. The recent structural reforms are mainly aimed at eliminating these distortions and then returning to the fair levels of inflated prices that correspond to the levels of income of citizens. This in turn explains the current large declines in the value of real estate transactions over the last four years, as a result of the decline of forms of monopoly and speculation on land in the first place.
A gradual decline in the prices of various real estate assets began, which has become apparent from all market players and all members of the community.
Despite this decline in market price levels, it is still very high, which is far from the ability of most citizens to measure their annual income level, and a measure of their creditworthiness, which clearly indicates the strength of the possibility of continued decline in prices of land and real estate that supports the acceleration in the near future.
The introduction of the principles of responsible finance approved by the Saudi Arabian Monetary Agency (SAMA) that in order to protect the financial sector and society, and works to reduce the income of borrowers on which the loans will be calculated.
It would be done after deducting the fixed expenses thereon, in addition to reducing monthly payment installments of 55% of the maximum monthly income available, which is a positive factor added to the previous factors pressing on inflated prices, which became known to everyone (the increase in offers of sale of land and real estate, the increase in the number of land subject to development and use, the continued high interest rates, the continued eviction of expatriates and their families from rented housing, the continued decrease in the cost of rents, and the actual application of the sustainability certificate on housing, etc.).
On the other hand, local real estate market performance indicators ended the investment funds (15 investment funds) performance last week at the same levels of the previous week, and remained at the same rate of losses of an average of 15.0 per cent, compared to the levels of prices of units traded at the IPO.
Net capital losses exceeded SR 1.9 billion at the end of the week compared to their capital at the time of the listing.
