Housing Abroad: Middle East

Housing Market Composition

Characteristics of the housing market in the region can be summarized into three categories: homeownership (housing hereafter) and rental and social housing. A similar average homeownership ratio in this region is observed relative to advanced countries: About 65% of Organisation for Economic Co-operation and Development (OECD) countries’ population, on average, lived in self-owned houses between 1995 and 2007. In the region, this percentage varies from 38% in Egypt to about or over 80% in Syria and Tunisia. For the other two categories—rental and social, or subsidized, housing—there is a relatively larger fraction of rentals in most countries. In spite of the high homeownership ratio in the region, there is a shortage in housing stock, particularly affordable low- and middle-income housing. Supply rigidities are partly attributed to land supply [Page 326]constraints, which appear to exist in all countries with supply gaps. Demand in the rental segment of the housing market took off in the late 1990s, driven by rising incomes (including from remittances) in net oil importer economies (NOI) and growth in the number of expatriate workers in net oil exporter (NOE) economies. Since 2002, the market has been dominated, in terms of value, by the luxury and middle- to high-income market segments, which is tailored to high-income expatriates, seasonal tourists, national professionals, and the wealthy. Social housing accounts for the remainder of the market, ranging from a high of about 30% in Egypt (rising to 65% to 90% in certain cities) to only 5% in some of the Gulf Cooperation Council (GCC) economies. Social housing policies can be either enabling or regressive in the region. During the 1990s and the first half of this decade, state subsidies were highly regressive in Algeria, Egypt, and Morocco. But in many other countries, well-targeted policies—including enshrinement of the right to decent housing in state law (e.g., Bahrain and Saudi Arabia)—have enabled more affordable housing. This is usually complemented by softer housing finance terms offered by banks and nonbanks. It should be noted that in the literature, social housing is found to dampen house price volatility.

Mortgage Market Innovations

Housing finance systems in the region have developed rapidly, in terms of both sources and instruments of financing, during three distinct stages over the past two decades: from the early to mid-1990s, the late 1990s and early 2000s, and post-2003. During the first stage, primary mortgage markets—although having been in existence for several decades—were very small. Sources of financing were limited to personal equity from bequests, savings, and remittances. Private banks were very conservative and stipulated that a large fraction of a property's face value be paid up front. Lack of credit information about borrowers drove up the price of housing loans, and highly regulated markets resulted in chronic underfunding. Deregulation of the region's mortgage finance market began in the late 1990s. This second stage of development featured competitive pressure brought on by the entry of additional traditional incumbent banks and a wider variety of products. While housing finance access broadened, it remained limited to high- and middle-income households. Moreover, large deficits in infrastructure and tight regulation persisted. The third stage of development commenced in 2003 and resulted in a profound change in housing finance across all dimensions. Newly established nonbank financial and specialized institutions entered the market with Islamic and non-Islamic mortgage financing instruments and often were both financiers and large investors in both the residential and commercial real estate sectors. They acted to extend the duration of mortgage loans, from the traditional 7 to 15 years to as long as 30 years in some countries. Lower mortgage borrowing costs were reflected in higher loan-to-value (LTV) ratios and lower mortgage rates across most of the region. A comparison of countries across the region in terms of mortgage financing reveals different development stages for NOE and NOI. Whereas NOI are still in the stage where the government is shifting from a provider to a regulator of mortgage lending and the financial sector remains conservative in lending, NOE are much more developed. Countries such as Bahrain, Kuwait, and the United Arab Emirates (UAE) have almost fully deregulated their mortgage markets, including by introducing state-of-the-art mortgage regulations, securitization infrastructure, and secondary mortgage markets.

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