Over the coming two decades, the number of people living in the towns and cities of the Middle East and North Africa is forecast to increase by about 129 million people. Not only will they all need somewhere to live, they will need somewhere affordable to live – something that will put massive pressure on both the region’s housing market and its nascent mortgage industry.

Control is so important in mortgages … This is a medium to long-term sale and what happens post-sale is vitalDo

Mungo Dunnett, Mungo Dunnett Associates

“There is a huge need for housing,” says Syed Farhan Fasihuddin, housing specialist at the International Finance Corporation (IFC), part of the Washington-headquartered World Bank Group. “Most of the countries have a housing crisis and they realise that unless they do something it’s just going to get worse and worse.”

Saudi challenge

One of the Gulf countries facing the biggest challenges is Saudi Arabia. An extra 10.5 million people will be living in the kingdom’s cities by 2030, according to estimates from the World Bank. The additional demand for homes that this will inevitably create makes it essential for Riyadh to have a sustainable model for housing finance in place – something that it is currently lacking.

The introduction of a mortgage law has been repeatedly delayed in recent years, not least because of the downturn in property markets since 2008, but it is expected to emerge in the near future. Naveed Siddiqui, chief executive officer (CEO) of the local Capitas Group International, a Sharia-compliant housing finance company, says Riyadh was wise to review its plans given the turmoil in financial markets. “It’s prudent and diligent on the part of the decision-makers to go through this review,” he says.

Nonetheless, Siddiqui and many others involved in the industry are hoping the review process will be completed before the end of this year so that the mortgage industry can at last start to develop properly. Estimates of the size of the existing GCC mortgage market put lending at less than 5 per cent of gross domestic product (GDP), compared with 55 per cent in the UK and 30 per cent in Malaysia.

“It’s come to the point where the market is demanding it and needs it,” says Siddiqui. “There is pent-up desire for home ownership in Saudi Arabia. People are moving away from communal family living. The appetite is for more people to move out of the family nest and build their own nest.”

However welcome it may be when it comes, a mortgage law on its own will not solve all the problems in the market. According to Mungo Dunnett, chairman of UK-based consultancy Mungo Dunnett Associates, which works with mortgage lenders around the world, there are a host of other problems that need to be resolved for a healthy mortgage market to develop, not just in Saudi Arabia, but across the region.

The issues are often ones of transparency. In some countries it can be difficult to prove someone has legal ownership of a property, for example, or to gain a clear picture of their credit history.

“Legal frameworks vary enormously from one country to the next,” says Dunnett. “The whole process of lending money in the expectation that you’re either repaid the principal and interest or that you can take punitive action by repossessing a house, selling it and getting your money back presupposes strong legal frameworks. The legality of the repossession process in particular is extremely complex and variable across the Middle East.”

“Even today in some of the GCC countries, to enforce a mortgage on a national is a challenge,” says Raman Lakshmanan, CEO of Bahraini mortgage provider, Sakana Holistic Housing Solutions. “Particularly if the national is living in their own house.” In some countries, such as Egypt, mortgage lenders can also find it difficult to accurately gauge a person’s income and so their ability to repay loans.

Untapped market

“The big untapped market outside the Gulf is Egypt,” says Dunnett. “The difficulty there is that about half of the disposable income within the country is undeclared – it’s cash or second or third jobs people are holding. So proving your ability to repay your mortgage by proving your income is extremely difficult. If I were to honestly declare my income, it would be at least double what I’m telling the Egyptian taxman, so there’s a concern the bank would immediately give my income information to the tax office and I would be punished, arrested or worse.”

People can often be tempted to borrow more than they can easily repay, particularly when interest rates are low and the cost of housing is out of kilter with average earnings – in the Gulf, accommodation is often heavily weighted towards the luxury end of the market.

“There’s a huge amount of oversupply in the GCC markets, which is skewed towards the luxurious end rather than the affordable end,” says Lakshmanan. “In the low to middle-income housing market, there is probably not enough supply and that goes across the GCC market.”

Despite such difficulties, the supply of housing is not the main issue preventing a healthy, competitive mortgage market developing in the region. The key issue remains access to finance – not just for potential home buyers, but also for the finance companies themselves.

The structure of the market means there are currently few options for mortgage providers wanting to sell the loans they have on their books to other investors. Unless this secondary market develops, lenders will not be able to recycle their capital to provide more finance, restricting the growth of the entire market.

Liquidity shortage

Some governments have set up companies to provide extra liquidity, such as the Jordan Mortgage Refinance Company, which was established in 1997 and the Egyptian Mortgage Refinance Company, which began operations in 2008, but there remains a significant shortfall.

“There are very few of these kind of institutions in the region and that’s one of the biggest issues,” says Fasihuddin. “There’s no long-term funding available. You don’t have the Fannie Mae or Freddie Mac type institutions you have in the US. You don’t have an active securitisation market or an active bond market.

“Since there is no long-term funding, the tendency of primary mortgage companies is not to lend for too long a period. If you look at the mortgages, the tenor tends to be 5 to 12 years. Sometimes they may go up to 15 years but nothing beyond. Compare that to the US where you’re looking at 30-year mortgages, which are a lot more affordable.”

Without an active secondary market, there is little chance the mortgage market will be able to provide the amount of finance that is required in the years ahead, or offer the longer repayment periods that most people need.

Regulators are no doubt wary of opening up the floodgates too quickly, in case a property bubble emerges. The untrammelled speculation, which was seen during Dubai’s real-estate boom and which, once it turned to bust, helped to drag the emirate’s entire economy into recession, is a valuable lesson for all to heed.

“The worst thing you can do as a mortgage lender is achieve overheated sales growth,” says Dunnett.

“It’s easy to become the biggest lender in any town or any country, but it’s difficult to make any money out of that. You give too much money to too many people, who shouldn’t have been given it. So fear growth – everyone wants growth and to be successful. It’s a dangerous thing in the mortgage world.”

If the authorities can get it right, there ought to be wider benefits to a vibrant mortgage market and higher levels of home ownership.

The availability of housing finance helps to generate economic growth in a wide range of other industries, including construction, maintenance and insurance.

It also offers opportunities for job creation and entrepreneurship, and owning a house can give individuals collateral and a means of economic empowerment.

Loss of control

When it goes wrong, of course, it can throw people into penury and send the wider economy into a downward spiral. The main problem in Dubai was essentially the same as in the mortgage markets in the US, the UK and elsewhere: a loss of control.

“The West lost control over its mortgage lending,” says Dunnett. “Control is so important in the mortgage game. This is a medium to long-term sale and what happens post-sale is vital.”

Countries in the Gulf and beyond appear to be learning from the mistakes that were made in recent years and there is widespread recognition that the regulations governing real estate and mortgage finance industries need to be tightened up.

“The regulations have to be improved,” says Lakshmanan. “That needs to be done quite quickly so that when the next boom happens we’ve learnt from our current experiences and we’re more geared up.

“The end-user is coming back into the market, but the speculator has gone away. It’s going to take quite a number of years for them to come back again, [but] they will come back when they see an opportunity.”

The Saudi mortgage law, when it emerges, will hopefully be a step in the right direction and one that could provide a model for other countries in the region. However, the details of the regulations have yet to be published and it might not meet everyone’s expectations.

“There are quite a few unreasonable expectations that once the law comes in it will solve all the problems in the world, which I doubt will happen,” says Fasihuddin. “But they need the law nevertheless. It is not going to take all the problems away overnight, but it is a start.”