The fast-growing population, bureaucracy, and lack of available land have led to a housing shortage in Saudi Arabia. According to the Ministry of Housing, 3.3 million additional units must be built by 2025. To tackle this issue, the Council of Ministers of Saudi Arabia recently approved a “tax law on vacant lands,“ aimed at encouraging housing construction and revitalizing the economy.
Saudi Arabia’s fast-growing population is exerting mounting pressure on different sectors of the country’s economy, with a particular focus on real estate. The current population of 31 million is expected to reach 37 million by 2025, leading the Ministry of Housing to announce that 3.3 million additional housing units are necessary over the next 10 years to meet rising demand. Over the past four decades, Saudi Arabia has created on average 150,000 houses annually, but today demand exceeds 300,000 units a year. In 2011, then-King Abdullah allocated $67 billion to the Ministry of Housing to build 500,000 units, but only a fraction managed to rise, due primarily to land shortages and bureaucracy.
Wealthy Saudi individuals and companies have traditionally used land for speculative profits by either keeping or trading plots multiple times, thus inflating prices. Eventually, it became more profitable to trade empty plots than to build on them. As a result, many urban spaces lay unused today. This situation has reached critical levels in major cities like Riyadh, where vacant land accounts for 49% of the urban area, or Jeddah and Dammam, where, respectively, 40% and 50%, of land remains vacant. All together, such practices have led to an estimated shortage of 1.5 million units.
In a bid to solve this issue, the Cabinet of Ministries in October 2015 recommended a tax on undeveloped land, collecting SAR100 ($27) per square meter. A month later, the Shura Council approved the proposal, though altered it and instead imposed a 2.5% tax of the value of the land. The White Land Tax entered into force on June 6, 2016, and is intended to increase the availability of land for development in order to reach equilibrium between supply and demand, provide residential land at affordable cost, and encourage fair competition and combat monopolistic practices. The government hopes plots in urban areas will be developed in order to avoid costly desert construction.
The tax will be levied annually on vacant residential and commercial plots within urban boundaries owned by non-government individuals. According to Article 8, the ministry will decide which cities the tax will be applied to. The location of the plot, the value of adjacent lands, and access to public utility services are the criteria set by the law to assess the value of the land. Article 9 stipulates that the scheme will operate in five phases. During phase one, the tax will be imposed on land with an area of 500,000sqm or greater. Following phases will address smaller pieces of land. It is not clear yet just how much development is required to exempt an area of land from the tax.
Although collecting funds is not the council’s main objective, real estate experts anticipate the measure to generate some $20 billion for state coffers. Proceeds from tax and fines for violations will be deposited in an account at the Saudi Arabian Monetary Agency (SAMA) and then invested in developing housing projects as well as used to improve water, electricity, and sewage systems. Homeowners in Saudi Arabia make up more than 60% of the Saudi population, but according to the IMF, if the number of residents living in traditional housing is removed, the number drops dramatically to 36%. In 2013, Saudi banks were allowed for the first time to offer mortgage financing. Among several initiatives, the government recently announced a new mortgage scheme in which the 70% loan-to-value requirement was raised to 85%. This will facilitate the possession of adequate housing for low-income families. The legislation is working toward the larger goal of the National Transformation Program 2020, which hopes to turn at least 52% of Saudis into homeowners, the Minister of Housing, Majed Al-Hoqail was quoted as saying in June.
Thanks to the new tax on white lands, real estate investors will likely begin selling their land to avoid taxation, allowing prices to go down. If effectively implemented, it could help middle class Saudis own their homes instead of renting them.