Real estate investment in Saudi Arabia is influenced by interest rates, as they affect the cost of borrowing for property investors. Lower interest rates can make financing more attractive, leading to increased investment activity. Investors may also find it easier to secure loans for property development or expansion projects during periods of low interest rates. However, rising interest rates may reduce the profitability of real estate investments, as higher borrowing costs can eat into potential returns. Therefore, real estate investors in Saudi Arabia closely monitor interest rate fluctuations to make informed investment decisions.
The Role of Government Policies in Shaping Interest Rates and Real Estate
In Saudi Arabia, the government and regulatory bodies, such as SAMA, play a crucial role in setting interest rates and implementing policies that affect the real estate market. These policies aim to maintain stability, promote economic growth, and ensure the availability of affordable housing for citizens. By adjusting interest rates, the government can influence the overall liquidity in the market and control inflation. Consequently, changes in interest rates can have a profound impact on the real estate sector, shaping market dynamics and influencing buyer behavior.
The real estate financing sector for individuals in the Kingdom is expected to experience a further decrease due to the Saudi Central Bank’s decision to increase the rates of Repurchase Agreement (Repo) and Reverse Repurchase Agreement (Reverse Repo) by 25 basis points each.
During the second quarter of 2023, the amount of real estate financing for individuals in Saudi Arabia declined to SAR 16.9 billion ($4.5 billion), down from SAR 22.7 billion ($6 billion) in the first quarter of the year.
One of the primary factors contributing to this decline is the elevated interest rate, which raises borrowing costs and subsequently impacts sales. As a result, residential real estate prices are anticipated to decline.
Steep decline for large houses
The study also found that there is a significant decrease in demand for large houses in Saudi Arabia’s property market, which is attributed to a “steep decline.” This decline is primarily driven by young Saudis who are leaving their family homes at an earlier stage to pursue job opportunities in other locations.
The current market dynamics are undergoing considerable changes, as highlighted by Durrani, an expert in the field. With a relatively young population where 56% of Saudis are below the age of 35, there is a noticeable decrease in household sizes due to younger individuals moving out of their homes at an earlier age.
Inflation affecting home ownership
This shift results in a decline in multigenerational family living arrangements, as younger Saudis migrate within the kingdom in search of better career prospects.
This shift results in a decline in multigenerational family living arrangements, as younger Saudis migrate within the kingdom in search of better career prospects.
The increase in inflation is having an impact on the ability to own homes.
By the end of 2022, the inflation rate in Saudi Arabia was 3.3%, which is considerably lower than global levels. However, the Saudi Central Bank (SAMA) has been following the United States’ fiscal policy and has raised interest rates in alignment with them.
The headline interest rate in the Kingdom rose from 1% to 5% by the end of the previous year. This increase has had a clear effect on households with mortgages, as the number of transactions has declined. Homeowners are now carefully considering how to balance the costs of home ownership with their other fixed expenses. Despite efforts by authorities such as the Saudi Refinance Company, which extended mortgage terms to 30 years (previously capped at 25 years), households remain cautious. This cautiousness is evident from the results of surveys conducted on this matter.