Riyadh has imposed an annual tax on undeveloped urban land in a bid to boost construction and address the shortage of affordable housing in the kingdom.

The rules have been finalised for the introduction of a land tax, which was first announced by the cabinet in November. Individuals or non-government entities in Saudi Arabia will now have to pay 2.5 per cent of the value of the land held, UK news agency Reuters cited the Housing Ministry as saying on its Twitter account.

Fines for failure to pay would reach up to the amount of tax owed, the ministry said, adding that the revenues raised would be spent on public services such as roads, water, electricity and sewerage systems at ministry housing projects.

The housing shortage is a politically sensitive issue in Saudi Arabia. In 2011, the kingdom put in place a $67bn programme to build 500,000 homes over several years. In order for the government to reach its target of 3 million homes by 2025, it will need to build roughly 330,000 houses a year, according to a report released by MEED at the end of 2015. On 26 January, the housing minister said the kingdom intends to spend SR1.5 trillion ($400bn) on building 1.5 million homes for Saudi nationals in the next seven to eight years.

About 40-50 per cent of the land in and around the kingdom’s major cities, such as the commercial hub of Jeddah and the capital Riyadh, remains vacant, much of it owned by wealthy individuals or companies that trade it for profits rather than developing it for housing, Reuters reported, citing analysts’ estimates.

Under a broad economic reform plan announced last week, the Saudi government said it would aim to increase the rate of home ownership among its citizens by at least 5 percentage points by 2020 from the current 47 per cent.