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Letter From Arabia II: Moving Down

By David A. Andelman

RIYADH, Saudi Arabia—Feras got married last year and now, within the next year he, his wife, and the new child they hope soon to be on the way, will be in the market for their first house. They are not alone. Millions of Saudis will soon be nearing the age of family creation and home ownership. The problem is that many, if not most, of them won’t be able to afford it.

Saudi Arabia is well into the core of its baby boom. While the United States’ baby boomers are nearing retirement, here in Saudi Arabia, three decades after the start of the American boom, they are just beginning to come of age in their own right. But the problems of the Saudi middle class are perhaps the most profound facing the aging regime of the princes who rule this, the wealthiest of the Middle East nations. The Saudi baby boom may be traced directly back to the 1970s, when in a matter of months the price of oil surged from $3 a barrel to $11 (en route to today’s price of $97 a barrel). Suddenly, the nation was awash with money and Saudis saw a new and unheralded prosperity stretching on into an indefinite future. A baby boom was born.

The products of this boom are coming of age in far more parlous times—a growing segment of the Saudi population that is being increasingly squeezed by inflation, speculation, and corruption. At the very moment when their aspirations, encouraged for decades by their parents’ generation, should be achievable, they are not. Over the past 20 years, the average price of a home in the major Saudi cities, where the bulk of the middle class lives, has soared from 800,000 to 1 million Rials ($200,000 to $250,000) to 2 million to 3 million Rials ($500,000 to $750,000). Most homes have seen a three-fold increase in price, while salaries have grown barely 15 percent.

 “Saudi’s sharp population growth is causing housing demand to outstrip supply,” reports Lalaine Delmendo of the Global Property Guide. “The Kingdom’s population is growing by more than 2 percent annually [Compared with 0.91 percent in the United States, among the highest in the developed world.] It is dominated by young middle-class Saudis who are first time homebuyers. About 45 percent of the country’s population [is] below 20 years old.”

Some 80 percent of all unmet demand for housing comes from middle-income households, with home ownership currently below 35 percent, “mainly due to lack of mortgage finance,” says Delmendo. “Saudis generally prefer to buy rather than to rent properties.” According to Banque Saudi Fransi, some 275,000 units a year need to be built from 2012 to 2015 to meet demand. Even if this many units are built, though, there’s unlikely to be very many folks who’ll be able to afford them.

The middle class in most developing, and indeed developed, nations is the bedrock of society and its stability. When these foundations are challenged—more than any other issue, more than the rights of women to drive or vote, more than freedom of expression—there is the potential for unhappiness. Unhappiness in most such nations breeds discontent, or worse. This is a central lesson of the Arab Spring, watched by the leadership with such unease in this still tranquil corner of the Middle East. “The princes need a keen sense of survival,” suggests one leading Saudi commentator. “The situation smacks of total corruption.”

Royals, Cause and Effect

The royals, many of whom are the root causes of this problem, are casting around desperately for a solution. Still, ironically, it is some branches of the royal family who are at the root of the problem in the first place. Decades ago, it seems, the kingdom’s rulers began to distribute large tracts of royal-controlled lands to certain princes, many of whom profited enormously by selling off these plots to developers. At each stage, the costs multiplied, at times two- or three-fold.

For a long time, this posed no problem. The government was prepared to grant interest-free loans to any Saudi who wanted to buy a home, the size of the loans covering the building and the land, even at sharply inflated rates. Eventually, though, as land became increasingly scarce, costs soared and the interest-free loans covered an ever-dwindling portion of the purchase price (now, by some estimates barely 30 percent to 50 percent).

 Last year, King Abdullah, clearly aware of the problem, disclosed that the kingdom would be throwing some $66.7 billion at a solution, building 500,000 houses. The problem is that the nation is finding demand increasing at a minimum of 150,000 to 200,000 units each year. It’s a tide of potentially frightening dimensions.

One senior Saudi businessman who follows the housing market closely estimates that in the 1980s and 1990s, before the baby boomers really began coming of age, some 80 percent of all Saudis who wanted to own their own homes did so. Today, he calculates that figure has dropped to 40 percent. Within the next decade, he fears that barely 20 percent of all Saudis wanting to become homeowners will be able to do so.

At first, it might seem that the problem is a simple one, governed only by how much funding the leadership of this nation is prepared to throw at what is increasingly taking on the dimensions of a crisis. As long as oil prices hold up, the resources would appear to be all but unlimited. But then there is the second part of the equation—the developers. Many are simply sitting on the vast tracts of land they’ve gobbled up. They will likely continue to do so as long as they see prices rising—and they are, by as much as 15 percent a year in and around Jeddah, the kingdom’s second largest urban area after the capital, Riyadh.

“Selling prices and rentals are expected to maintain their upward move given the persistent supply shortage of affordable units along with the country’s young and growing population,” concludes the Saudi Gazette, a Jeddah-based English language newspaper that hews closely to the government line, “driven by stringent supply shortage coupled with affordability constraints.”

“There’s no way you can fool young people any more,” says Khaled A. Almaeena, editor in chief of Saudi Gazette and one of the nation’s leading public intellectuals. “People, of all ages, want results.”

At lunch, Feras acknowledges this reality and shakes his head sadly. “I don’t want to raise my family in an apartment. No Saudi wants to do that. But an increasing number may have to. This will not make for a happy middle class.”

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David A. Andelman is Editor of World Policy Journal. He last visited Saudi six years ago. This visit was made under the auspices of the IRP Gatekeeper Editors program of the International Reporting Project.

For David A. Andelman's first letter from Arabia, click here.

[Photo courtesy of Jackson Lee]

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