Saudi King Abdullah's bumper cash pledge to build more homes shows the kingdom's intent to address vast undersupply in the world's biggest oil exporter, but there is no quick fix for its property woes.   

In a rare televised speech last week the king announced $93 billion in social handouts, the second benefits package to be unveiled within a month, and included 250 billion riyals ($67 billion) to be spent on 500,000 new homes.

The move was part of the ruler's efforts to stave off a wave of Arab unrest that has gripped neighbouring Bahrain, Yemen and Oman. It was also a direct call of support for affordable housing across the country.   

'We see that it's a commitment and recognition of a challenge facing Saudis but we don't expect it to have immediate impact, with substantial time needed to deliver the number of housing units,' said Monica Malik, chief economist at EFG-Hermes in Dubai, adding it could take some 5 years before the homes would be built.   

A report by Banque Saudi Fransi said private and public developers need to build about 275,000 units a year through 2015 to meet demand for about 1.65 million new homes in the country.

In another to move to address the problem, the kingdom on Friday set up a ministry for housing.

However, the absence of a clear mortgage law, which has been in planning stages for almost a decade, has left Saudi with no framework to govern property ownership, deterring foreign banks from lending and private developers from entering the market.   

Saudi Arabia only has a 2 percent mortgage penetration in its real estate market, industry experts said. 'Only 30 percent of Saudis actually own homes and less than one percent of all homes purchased are financed by mortgages,' Waseem Saifi, the global Islamic Banking head at Standard Chartered Bank said earlier this month.

'Most development so far has happened at the upper end ....
we need to see a lot of additional units coming at the middle level where demand is really there from the Saudi community.'    

Saifi said there isn't a robust real estate market in Saudi Arabia to attract investors and one of main reasons is that the mortgage law is yet to be passed.   

'So, most of the financing would be state-assisted financing with some element of personal loans as well as family loans trying to provide bridging of the gap.'    

Banks do extend loans to wealthy Saudis but there is currently no legislation on what should happen if a borrower defaults. That makes banks reluctant to lend more widely and forces average Saudis to rely on the state-run Real Estate Development Fund (REDF), which offers sharia-compliant, interest free loans.

While the draft law is still waiting for approval, industry players continue to worry about when it will actually be passed and remain sceptical over its effective implementation.   

'Banks are going to see how the law is implemented first. It's not as if they will open the flood gates and release capital to everyone,' said John Sfakianakis, chief economist at Banque Saudi Fransi.   

Even if and when passed, the law is unlikely to solve the housing deficit completely.
 'What the law does is provide access to financing but does not necessarily solve the affordability issue, unless you have downward pressure on prices,' Sfakianakis said, adding this would require the supply of more land.

The average price of a small villa in the kingdom's capital Riyadh rose 19 percent in the second half of 2010 while prices in Jeddah rose 17 percent, Banque Saudi Fransi said in its report.   

The minimum salary required to mortgage villas and apartments is out of reach for a vast number of state and private sector employees, most of whom earn less than 8,000 Saudi riyals ($2,133) per month, the bank said.

'The other way to fix it is to raise incomes which is not a short-to-medium term solution,' Sfakianakis said. - Reuters