Article Title Page Realizing the dream of owning a home: a preliminary study of house purchase financing options for low income Saudis Author Details Robert A. Opoku, Department of Management & Marketing, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia Alhassan G. Abdul-Muhmin, Haworth College of Business, Western Michigan University, Kalamazoo, Michigan, USA Corresponding Author: Robert A. Opoku Corresponding Author’s Email:
[email protected] Acknowledgments: The author gratefully acknowledges King Fahd University of Petroleum & Minerals for providing research grant and using its various facilities in the research and preparation of this paper. Biographical Details: N/A Structured Abstract: Purpose - This study investigates the house purchase behavior of low-income Saudis regarding the sources of financing they wish to have access to, their preferences for alternative financing options, and the monthly payment amounts they could afford to make in case of mortgage financing across demographic groups. Design/methodology/approach - A survey with a sample of 815 low-income respondents with a monthly income of SR 7,000 was conducted using a structured questionnaire. Findings - The main findings of the study are that the loan from the government Real Estate Development Fund (REDF) is found to be the most preferred financing alternative and the second being cash payment; whilst the most frequently indicated option for monthly mortgage payments are between SR 1,000 and 1,500 (US$267 and 400) among low income Saudis. Research limitations/implications - This study provides a snapshot of low-income Saudi consumers' knowledge of financing options and their choice among alternative financing options. Practical implications - This also offers opportunities for real estate developers to seek competitive advantage by coming up with innovative financing options to target low-income earners. Originality/value - There is limited published work exploring consumer knowledge of house purchase finance options that capture this phenomenon from the perspectives of low-income Saudi consumers. This study contributes in filling this gap. Keywords: Arab; developing countries; housing financing; Middle East; low-income consumers; real estate; Saudi Arabia Article Classification: Research paper
For internal production use only Running Heads:
Realizing the dream of owning a home: a preliminary study of house purchase financing options for low income Saudis
INTRODUCTION Housing policies in developing countries have long supported home ownership yet access to purchase financing by low-income earners continues to be a mirage. Middle East and North African (MENA) countries which share a number of attributes with other developing countries (Erbaş and Nothaft, 2005) have affordability problems regarding quality housing for lower-income households (Sanders, 2005). Yet, there is limited published work exploring consumer knowledge of house purchase finance options that capture this phenomenon from the perspectives of low-income consumers in the context of developing countries in the Middle East. Generally, this geographical space has been delimited as a unit of analysis in orientalist and social science scholarship (Shami, 2004). This paper, therefore, focuses on Saudi Arabia, a Middle East giant, and the world’s largest oil exporter which needs 2 million homes by 2014 to keep up with the demands of a population that quadrupled over 40 years, Credit Suisse Group AG estimates. Coupled with the accelerated population growth, Saudi Arabia’s lack of affordable housing and jobs for the youth are complicating social norms because many young citizens are unable to get married and set up homes (Arabnews, 2011) since securing an apartment is a prerequisite. Even for those employed, the cost of buying single family homes is gradually becoming out of reach for the public sector (where vast majority of Saudi nationals are employed) workers and young graduates whose average monthly incomes are between SR 5,200 (US$1,387) and SR8,000 (US$2,133) (Samba Financial Group, 2010; Sfakianakis, 2011). Assuming that such a purchase is even manageable, both mortgages and
sufficient quantity of housing at affordable price are also not available because much of the property investment in recent years has gone toward the upper end of the market or into commercial real estate development without addressing the housing needs of the wider population. Whilst policy innovation and research into the supply side of housing finance is well advanced in the literature, the opposite holds for the demand side. In fact, the understanding of the demand side of the equation appears to be elementary (Datta and Jones, 2001; Smets, 2006). Warnock and Warnock (2008) argue that the complexity of the housing market system calls for complete separate studies on housing supply and housing demand. In this regard, the purpose of this paper is two fold: (1) to investigate low-income Saudi consumers' knowledge of mortgage loans and other financing options available in the marketplace and (2) their choice among alternative financing options. In this preliminary descriptive study, three questions relating to low income earners’ house purchase financing options were further investigated: (1) What are the sources of financing (available financial products) that these low income earners believe they will have access to? 2) What are the preferences for the different financing options? 3) How much in terms of monthly mortgage payments that these low-income earners can afford if they have access to mortgage financing option? Without knowledge about the available financing options, it will be difficult for low-income households to purchase homes. Therefore, it is imperative for these potential consumers to understand the true structure of financing options available in the marketplace with the view to helping them make an informed decision when they consider owning a home. This study therefore highlights the importance of house purchase financing options relative to other opportunities available to low-income
earners in Saudi Arabia and reinforces the vision of governments in creating the enabling environment for the private sector to provide house purchase financing options. The findings presented in this study can also be used as input into the credit and construction costing of housing units to be developed for low income earners. This study is further expected to provide a basis on which academics and practitioners in real estate can begin to understand and explore this under-researched area in developing countries. The remainder of this paper is structured as follows: First, we present an overview of the Saudi housing market, available financing options and review some pertinent literature in this area. Second, we then present the methodology and analysis of the data. Third, the findings of the study are presented and the implications of the findings are also discussed. Lastly, conclusions, implications, limitations of the study and some future research considerations within the scope of this field are also outlined.
BACKGROUND Overview of the housing sector in Saudi Arabia and its financing The housing sector is at the center of the Kingdom's real estate growth and comprises 75 percent of all activities in value terms (Saudi Arabia Investment Fund, 2006). The main driver of the housing market is the size and rapid growth in population thus making it ten times bigger than any other Gulf market (Samba Financial Group, 2010). Saudi Arabia's population has been growing by almost four fold during the last three decades, rising from 7.3 million in 1975 to 27.1 million in 2010 (Samba Financial Group, 2010). This has resulted in a very young demographic profile, with around 44 percent of the population currently aged between 15 and 39 years old. This
young age profile and the rapid rate of urbanization (growth of the major cities) have been the major demographic factors driving the real estate market. Besides, government spending and housing shortages are also fueling rental rates to skyrocket. Although inflation is between 5 and 7%, rental prices are increasing at an annual rate of 9% (Samba Financial Group, 2010). The rental price of high-end rental market has been driven by high-income expatriates and religious tourists whilst the low end is influenced by blue collar expatriate workers. More especially, the rise in rental prices for low-end houses is expected to continue for some time because developers tend to focus on high-end rather than lower-or-medium-income residential units. This has further been compounded by the introduction of the Escrow Law in 2008 which prohibits most types of off-plan selling without approval from the Saudi Real Estate Commission. In order to meet the demand, Saudi Arabia Investment Fund (2006) predicts that a total of 2.62 million housing units will have to be built whilst SR 75 billion will be required to meet the annual housing demand in the kingdom by 2020. Saudi real estate market is large and fast growing but it remains underdeveloped, with the balance of estimates suggesting that only 30% of Saudis own their own home (Samba Financial Group, 2010). Up till now, the major avenue for Saudis wanting to obtain finance to buy a house has been through the Real Estate Development Fund (REDF) which is under the Ministry of Housing. This government intervention in housing provision dates back to the mid-1970s. Through this fund, interest-free, easy term loans and payable in ten years are made available to ensure the provision of appropriate housing for Saudi citizens, especially those with limited income. Since its inception, the REDF has provided SR153.7 billion loans up to the end of 2010 (Saudi Arabian Monetary Agency, 2011). Although REDF is capitalized
at SR80 billion, half of this is now classified as delinquent because most Saudis take this loan as another government ‘hand-out’ for the poor. Currently, the maximum loan an applicant can raise has been increased from SR300, 000 to SR500, 000 (US$133,333) yet access to this fund is all too often confined to few people especially those working in government service. With no family financial support, the prospect of accessing this fund by those working in the private sector appears to be very bleak. In addition, local banks demand significant interest on mortgages, making them even more unaffordable. This situation is not likely to change anytime soon until clear legislation on mortgages is instituted to help support the banks’ ability to foreclose on borrowers who fail to keep up payments (Sfakianakis, 2011). Apart from the governmental initiatives, there have been couples of other housing development foundations that are providing housing units suitable for segments in utmost need. In spite of these initiatives, the government and these philanthropists' roles in financing home buyers are limited. Indeed, the accelerated population growth and the rising demand for housing call for the creation of other real estate financing mechanisms in addition to that of the government and philanthropic initiatives. Although Saudi Arabia has just introduced a mortgage law, it is yet to issue regulations and licenses to mortgage firms whose products are based on the Islamic lease financing model). Nonetheless, there have been other prior initiatives by some private and public organisations. For instance, the Ministry of Trade and Industry approved the launch of Saudi Home Loans Company (SHL) in 2007. With a seed capital of 2 billion riyals ($US533 million), SHL seek to provide loans that are compliant with Islamic mortgage laws. In 2007, Aayan Arabia holding also signed an agreement with Canada Mortgage and Housing Corporation (CMHC) with the view to
providing technical support for the establishment of Aayan Housing Finance Company. To address affordability and accessibility, CMHC and Aayan Housing Finance Company plan to enhance housing finance in Saudi Arabia with Shariahcomplaint mortgage lending systems. Dar-Al-Arkan, the kingdom's largest private real estate company with a capital of Rls 5.4 billion ($1.5billion) has also set up a mortgage finance joint venture with Kingdom Installment Company ( KIC), Arab National Bank (ANB) and the International Finance Corporation (IFC). This joint venture mortgage company is capitalized at SR 2.0 billion and is aimed at helping low-income earners and the youth to purchase suitable house by providing them with Shariah-compliant financial products. Despite all the efforts by the government and the private sector to provide affordable housing for low income household, Saudi Arabia currently has a supplydemand mismatch. The housing supply is concentrated towards the high income residential segment, whereas the middle and low income population remains underserved (Rana Investment, 2008; Erbaş and Nothaft, 2005; Samba Financial Group, 2010). However, considering the housing financing options enumerated above, it appears that low-income Saudis have some alternatives to choose from. Yet, it is not clear as to low-income Saudis’ level of knowledge about mortgage loans and other financing options and their choice among these alternatives. This study is therefore an attempt to fill this void.
LITERATURE REVIEW House purchase financing in developing countries Housing finance systems in many developing and emerging economies have shared characteristics. First, most housing finance systems are dominated by private sector
lenders as well as several government-managed housing finance institutions or programs (Renaud, 1997). Yet, poor organization, political manipulation, and government-managed housing finance institutions have generally contributed to the poor recovery of loans (Datta and Jones, 1999). As a result, some governments continue to review housing policies (Bentzien, Rottke and Zietz, 2012; Poon and Garratt, 2012; Gibb, 2011; Whitehead and Monk, 2011) and reform public housing finance institutions with the view to making them more prudent. They have also set up regulatory regimes to encourage private finance institutions to come on board (Boléat, 1987, Buckely, 1996, Okpala, 1994; Renaud, 1999; Poon and Garratt, 2012). Other housing finance solutions are available such as subsidies and the outright provision of public housing but these can be unsustainable (Quigley, 2000). Second, the sources of housing finance can either be formal and informal but low-income households in developing countries most often have no access to formal housing finance institutions (Datta and Jones, 1999). In Malawi for instance, Nyasulu and Cloete (2007) finds that finance from the formal sector is accessible to fewer than 35 per cent of the urban population and less than 16 per cent of households in the major urban areas can afford an average house. Malawi, being one of the poorest countries in the world has its low-income households lacking stable sources of income through which regular savings and repayments can be made. Its low income earners have no collateral with clear titles to authenticate security of tenure and are therefore perceived to be a bad risk. Unfortunately, no government subsidies are available for end users and development financing is limited and extremely dear in Malawi. Struyk, Katsura and Mark (1989) also analyze the possibility of recent home purchasers obtaining a loan from a formal finance institution in Jordan. They find that purchasers in rural areas are much less likely to obtain such loans. In urban areas, the probability
of accessing formal finance rises steadily with income. As a result, savings or shortterm borrowing has often been the dominant path to owning a unit of minimum acceptable quality in developing countries (Struyk and Roman, 2008). Others include family savings, selling of assets, and loans from individual moneylenders (Udechukwu, 2008). Proponents of informal housing and finance are critical of the prevailing predominant emphasis on mortgage finance (Baken and van der Linden, 1993; Datta and Jones, 1999; 2001; Rakodi, 1995) but promote the idea of incremental housing consolidation where residents are the producers as well as the consumers of housing. Their argument is that housing policy should focus on access to land, the provision of financial support, and to allow for gradual housing improvements over a period of time (Angel, 1983). Thus, with this model, the characteristics of micro-finance include small loan size for incremental upgrading of an existing dwelling or a new core unit, short repayment period, small or no subsidy, creative underwriting adapted to the conditions and prospects faced by low/moderate-income, technical assistance in documentation and building, and - sometimes - alternate forms of title as collateral (Ferguson, 1999, Mitlin, 1997; Patel and Burra, 1994). Thus, low-income households most often largely depend on informal housing finance mechanisms. Based on empirical investigations in two informal settlements in Dares Salaam, Tanzania, Sheuya (2007) explores the nature of savings in incremental housing development. The findings show that unpacking the concept of savings has the potential to uncover new opportunities for promoting housing finance in informal settlements, other than shelter microfinance. It can also be observed that most literature on formal housing finance in developing countries is tilted towards the demand side - mortgage financing for
housing consumers because of the failure of the earlier supply side to bridge the gap between the cost of housing and the affordability of housing consumers (Pugh, 1994; Renaud, 1999). Sanders (2005) argue that the lack of effective residential mortgage markets in developing countries often translates into lower home ownership rates or lower quality of housing stock. For instance, the leading cause of housing affordability problem in the Middle East North African (MENA) countries is that the mortgage markets are not well developed because of Shari'ah law, particularly for the lower and middle income segments (Sanders, 2005). Due to the unavailability of data to help link mortgage markets and the affordable housing market, Erbaş and Nothaft (2005) rely on simulations to analyze the effect of greater mortgage availability on housing shortages. The result indicates that mortgage market reforms lead to a significant increase in housing construction. Not withstanding the merits of the mortgage system, there is also substantial evidence that down payment affects mortgage availability and the timing of home purchase of young individuals (see Duca and Rosenthal, 1994; Haurin 1997). Chiuri and Jappelli (2003) have further provided econometric evidence linking the down payment constraint to the international differences in owner occupation rates. LaCourLittle (2007) also reported that individual credit characteristics, financial factors and pricing generally drive product choice. In examining the broad pattern of home purchase finance in the Greater Cairo area, Struyk and Roman (2008) conclude that the likelihood of paying all-cash by potential home buyers is declining at a decreasing rate. They added that those purchasing a new unit are 26% more likely to pay in installments. This has brought the issue of other viable financing options for lowincome earners into strong focus. Consequently, this has recently engaged the attention of researchers but for studies on developing countries, the limited stream of
literature has two dimensions. One is consumer knowledge of mortgage loans and other financing options (Moss, 2001; Struyk, 2007). The other is the choice among alternative financing options. In this regard, studies on choice among alternatives have been conducted in Jordan (Struyk, Kastsura and Mark, 1989), Korean and Philippines (Struyk and Turner, 1986) and Egypt (Struyk and Roman, 2008). However, the present study adds to the sparse literature on both dimensions.
RESEARCH METHODOLOGY Instrument Development To achieve the three fold purpose of this study, a survey was conducted using a structured questionnaire. The questionnaire used in the data collection consists of three main parts: The first part addresses the current housing situation of respondents in terms of the type of house, ownership status (i.e. whether owner-occupied or rented), and satisfaction with the house. In the second, respondents were asked to indicate, what type of house they would opt for, the sources of funding they are likely to access, and how much they can afford to make in monthly payments if they had the option of installment payments. As is usual in most cross-sectional surveys, the third part sought demographic information about the respondents such as gender, marital status, age, income, and education level. Prior to the main survey, an exploratory research was conducted to identify the sources of financing that these low income earners believe they will have access to. Twenty best male students of a marketing research class were trained as research assistants (see also Abdul-Muhmin and Umar, 2007) to conduct this pilot interview. They were asked to conduct depth interviews on 5-10 individuals, summarize the points discussed and write a brief report to the researchers. They reported to have
interviewed relatives, friends, parents’ workplace colleagues, and staff of real estate agencies. Ideas from the individual reports were integrated and compiled into a list. The list of ideas was then fed back to a class for discussion. The final questionnaire was further pre-tested in a small-scale pilot study before final implementation of the main survey.
Sampling and Data Collection According to two prominent Saudi financial institutions (SAMBA Financial Group, 2010; Bank Saudi Fransi, 2011), the average public service wage is SR8, 850 although most employees earn an average wage of SR5, 500. Based on the average of these two figures, the sample frame for the study was chosen as Saudi consumers with monthly incomes below SR 7,000 who do not currently own a house. In fact, the 2005 Saudi Household Survey conducted by Arriyadh Development Authority also established that low income earners are those earning below SR 7,000 per month. Due to the lack of official statistical data or a listing that could serve as sampling frame for drawing a random sampling and the inherent difficulties in drawing a probabilistic sample in Saudi Arabia, a convenience sampling was used in this study (see Bhuian, 1998; Al-Ashban and Burney, 2001; Abdul-Muhmin, 2002; Mullin Marta et al., 2004). In consonance with previous studies on Saudi Arabia (see Abdul-Muhmin and Umar, 2007; Opoku and Abdul-Muhmin, 2010), the questionnaire was distributed outside our stated sample. After the initial collection, respondents with incomes above SR 7000 per month were filtered out after data collection. It is believed that by keeping the sample size as large as practical will make the findings more reliable in this circumstance.
The research assistants (same as those used in the pilot interviews) administered the questionnaires in popular malls, public places and also through dropoff and pick-up method within their home cities and towns because the postal system in Saudi Arabia is not reliable (Al-Somali, Gholami and Clegg, 2009). Online survey was not an option because the use of such a tool would possibly exclude our target population. In all, 1412 respondents were collected but since the focus of study is on low-income respondents who do not currently own their houses, 815 met this criterion (see Table 1). Thus, we took out all respondents with incomes above SR7000 per month and those who currently own their own houses.
DATA PRESENTATION In Table 1, it can be observed that all Saudi major cities are somewhat represented in the sample of low-income respondents in this preliminary study. Most of the respondents reside in Dammam, Jeddah, Khobar, and Riyadh because they have high population concentrations. Table 1 Distribution of Low-Income Respondents by City City
Number of respondents
Percent
1. Dammam
211
25.9
2. Jeddah
109
13.4
3. Qatif
109
13.4
4. Khobar
107
13.1
5. Riyadh
66
8.1
6. Dhahran
64
7.9
7. Tarout
26
3.2
8. Al-Hasa
24
2.9
9. Makkah
13
1.6
10. Madinah
12
1.5
11. Saihat
9
1.1
12. Hafr-al-Ba
4
0.5
13. Safwa
3
0.4
14. Taif
3
0.4
15. Eleven other towns
55
6.7
815
100.0
Total
In terms of demographic characteristics (See Table 2), the patterns observed from the entire sample also reflect the low-income segment studied. The rather low proportion of females in the sample (only 13%) is not new in studies concerning Saudi Arabia. Females are usually difficult to reach for data collection (Abdul-Muhmin, 1998; AlAshban and Burney, 2001). Table 2 Demographic Characteristics of Low Income Group (Less than SR 7,000 per month) Gender Male Female
Count 709 106
Percent 87.0 13.0
Married Single
329 486
40.5 59.5
20-25 years 26-30 years 31-35 years 36-40 years 41-45 years 46-50 years 51-55 years Over 55 years
415 228 99 25 21 8 7 9
51.1 28.1 12.2 3.1 2.6 1.0 .9 1.1
Less than SR 3,000 SR 3,000-SR 5,000 SR 5,001-SR 7,000
299 285 231
36.7 35.0 28.3
Elementary Intermediate High school Diploma from technical colleges University degree Others
10 32 247
1.2 3.9 30.3
126
15.4
388 12
47.7 1.5
Marital status
Age
Monthly income
Highest level of education attained
Occupation Government employee Private sector employee Self-employed Other
281
34.5
190
23.3
258 86
31.7 10.5
DATA ANALYSIS House Purchase financing Three issues relating to house purchase financing were investigated in the study: (1) the sources of financing that respondents would like to have access to; (2) preferences for the different financing options they would wish to have; and (3) the amount of monthly mortgage payments that they would afford if they had the option of mortgage financing. Find below the analysis on the above three issues.
Preferences for Financing Option Table 3 shows respondents’ answers to the sources of house purchase financing and their preferences for the different financing options addressed in the questionnaire. It is quite clear that REDF loan is the most preferred wish followed by cash payment and then installment payments. Table 3 Preferences for Different Financing Options Available Financing Option Number of Percent of Total Respondents (815) Government REDF loan
383
47.1
Cash payment
233
28.7
Installment payment to the estate developer
222
27.3
Bank loan
126
15.5
Company loan (from respondents workplace)
118
14.5
Loan from friends or relatives
110
13.5
The results in this study show that apart from the government REDF loan, cash payment and installment payment to the estate developed for a unit, all the other categories of loan financing (either from the bank, company, or friends and relatives) are relatively least preferred by respondents. By making a modest contribution to fulfilling Saudis housing demand, REDF’s performance has previously been praised (Buchan, 1980; Assaf, 1987; Al-Hathloul and Edadan, 1992) despite the current challenges regarding access. Hughes (2004) has earlier also reported that cash is preferred for everyday transactions in Saudi Arabia. Although, installment sales have firmly been established as the largest source of credit in Egypt, a sister MENA country (Struyk and Roman, 2008), it is not the most preferred financing option in Saudi Arabia. The low percentages for this option and others can either be due to a general dislike for them or inaccessibility. For example, while some respondents will not even consider bank loans because of the inevitable interest payments, others who do not feel strongly about the interest issue may still not have access to bank loans because of the generally stringent requirements. Chéron et al., (1999, p.49) stress that applying stringent lending criteria to low-income borrowers may, in effect, lead to “their exclusion from the financial system (which) is not socially acceptable or legitimate”. Samba Financial Group (2010) highlights that the demand for houses is strongest within the price range SR500, 000 and SR750, 000 ($US 133,333 and $US 250, 000). The preference for cash payment as the second option therefore raises an interesting question as to how low-income respondents (as those in this study) wish to pay cash for houses. Perhaps, on the general level, young adults (which constitutes about 80% of the sample in this study) may be unprepared to effectively manage the psychological costs associated with high debt (Roberts and Jones, 2001; Norvilitis et
al., 2006). Although, the latter point may hold in Saudi Arabia, another plausible explanation could be that most Saudis consider house purchases as a ‘once in a lifetime’ investment, so they save enough money to make the purchase or construct it on their own. Whether this dream will be fulfilled or this wish is feasible is another issue but a Saudi, even if poor has very high expectations (perhaps due to religious faith) and will sit back to wait until he gets that expectation fulfilled. Therefore it may be considered reasonable to find low-income consumers in Saudi Arabia wishing to own residential units by paying cash.
Demographic Comparisons of Preferences for Financing Options To gain further insight into the data, demographic differences in the preferences for financing options were tested. This was done by conducting chi-square analysis using gender, income, and occupation. The results are summarized in Table 4. Table 4 Demographic Differences in Preferences for Different Financing Options Cash payment
Gender
Male
44.6
15.4
15.5
26.3
Loan from friends or relatives 31.1 14.0
Female
63.8
16.2
7.6
34.3
12.4
10.5
13.496
.044
4.620
2.959
15.627
.971
Significance
.000
.834
.032
.085
.000
.324
Less than SR 3,000
50.5
12.4
13.4
27.4
25.1
13.4
SR 3,000 – SR 5,000
50.4
19.0
13.0
23.9
25.7
14.1
SR 5,001 – SR 7,000
38.7
15.2
17.8
31.3
37.0
13.1
9.114
4.922
2.850
3.472
10.827
.116
Significance
.010
.085
.241
.176
.004
.943
Government employee
39.6
13.9
9.6
21.8
42.1
15.4
χ2
Income
χ2
Occupation
Bank loan
Company loan
Installment REDF payment loan
Private sector employee
41.1
21.6
22.6
34.2
15.8
14.2
Self-employed
54.8
16.1
0.0
22.6
16.1
16.1
Other
51.9
14.8
5.6
33.3
16.7
11.1
22.021
7.364
25.984
10.205
46.633
2.522
.000
.118
.000
.037
.000
.641
χ2 Significance
From a statistical point of view, the evidence shows that bank loans and loans from friends or relatives are equally unpopular among all demographic segments. On the other hand, there are statistically significant differences in preferences for cash payment and REDF loan among the three demographic categories. Specifically, a higher proportion of women prefer the cash payment option than men, while a higher proportion of men prefer the REDF loan than women. Several studies have indicated that women tend to be more risk averse in their financial behaviour (Burton, 1995; Graham et al., 2002; Jianakopolos and Bernasek, 1998). Therefore, women should tend not to develop an excessive personal debt levels and high interest payments as men (Dellande and Saporoschenko, 2004). As expected, preference for REDF loan financing also tends to be higher among government sector employees than the remaining occupational groups because such interventions have been very beneficial to the former (Huang, 1985) and easier to be accessed by them in Saudi Arabia.
Affordable Monthly Mortgage Payments One of the questions that were asked to help ascertain how much respondents can afford to make in monthly payments if they had the option of making monthly mortgage payments on a house. The question explicitly asked them to consider their current and expected future monthly income and family situation. Results of frequency analysis of this question are shown in Table 5.
A little over 71% indicated amounts ranging from less than SR 1,000 to SR 2,500. According to Arriyadh Development Authority household survey conducted in 2005, the proportion of income spent on housing by the average Riyadh household revolves around 30%. Therefore, it might sound reasonable for a person earning SR 3,000 to afford a maximum of SR1, 000 as monthly mortgage payment. Table 5 Affordable Monthly Mortgage Payments Monthly Amount*
Frequency
Percent
Less than SR 1,000
129
15.9
SR 1,000- SR 1,500
202
24.9
SR 1,501- SR 2,000
129
15.9
SR 2,001- SR 2,500
117
14.4
SR 2,501-SR 3000
86
10.6
SR 3,001-SR 3,500
37
4.6
SR 3,501-SR 4,000
54
6.7
Over SR 4,000
57
7.0
Total
811
100.0
*Monthly mortgage payments here exclude property insurance and utilities
Demographic Differences in Affordable Monthly Payments Further insight was sought into the results by testing whether there are demographic differences in respondents’ abilities to meet the affordable monthly mortgage payments discussed above. For instance, one of the analyses sought to find whether there were differences between male government employees and their counterparts in the private sector in terms of monthly mortgage payment. The same combination was used for females. The chi-square test did not establish significant associations between employment sectors of male (x2 (1) = 256.35, p > 0.05) and female (x2 (1) = 167.46, p > 0.05) respondents and the monthly mortgage payment. In Saudi Arabia,
the distinction between private and public sector is sometime blurred. For instance, companies like Saudi Basic Industries Corporation (SABIC) and the National Commercial Bank (NCB) are included in the private sector, although they are in fact controlled by the government. This could have impacted on the way respondents see the employment sector they belong to.
Further chi-square tests were conducted to ascertain if there was a significant association between educational level and affordable monthly payment. The results indicate that there exists such difference (x2 (1) = 125.36, p > 0.01). In other words, educational level appears to influence the amount of money respondents can afford to pay as monthly mortgage. This is not surprising because salaries are largely determined by educational levels (Bowles, 2001). This stands to reason that respondents with higher salaries can afford a relatively higher monthly mortgage payment. Nonetheless, no significant differences were found for other interactions such as age. Age does not seem to significantly affect affordable monthly payments as respondents under 30 years of age as well as those over 30 years of age showed the same level of affordability.
Table 6 Distribution of Affordable Monthly Payments by Income Levels Affordable Monthly Payments Less than SR 1,000- SR 1,501- SR 2,001- More than SR 1,000 SR 1,500 SR 2,000 SR 2,500 SR 2,500
Demographic variable Less than Monthly SR 3,000 Income SR 3,000-
Count Percent Count
221
57
18
1
74.4%
19.2%
6.1%
0.3%
114
96
58
11
0
Total 297
0.0% 100.0% 5
284
Total
SR 5,000
Percent
40.1%
33.8%
20.4%
3.9%
SR 5,001SR 7,000
Count
8
36
46
86
Percent
3.5%
15.6%
20.0%
37.4%
Count
343
189
122
98
42.3%
23.3%
15.1%
12.1%
%
1.8% 100.0% 54
230
23.5% 100.0% 59
811
7.3% 100.0%
Chi-Square (8 d.f.) = 146.375; p = 0.000
With regard to income effects, Table 6 shows that there are statistically significant differences. More interestingly, the proportion of respondents selecting the different amounts of monthly payment generally conforms to what one would expect. Majority of respondents with monthly incomes of SR 5,001 to SR 7,000 can afford to pay more between SR 1,000 and SR 2,500 a month in mortgage payments while majority of those with incomes of less than SR 3,000 a month indicate that they can afford to pay less than SR 1,000 a month. What is surprising however is that 6.1% of respondents in the “less than SR 3,000” income group indicated their ability to afford a monthly payment between SR 1501 and SR 2,000. May be, these respondents can genuinely afford (depending on their other commitments and income sources) but it could also be that their propensity to consumer housing are completely wrong.
CONCLUSION The study was conducted to investigate the house purchase behavior of low-income Saudis in relation to sources of financing they believe they will have access to, their preferences for alternative financing options, and the monthly payment amounts they can afford to make in case of mortgage financing across demographic groups. The main findings of the study can be outlined as follows: loan from the government Real Estate Development Fund (REDF) is found to be the most preferred financing alternative and this is followed by cash payment. Preference for cash payment is
especially high among women. Apart from the government REDF loan, all the other loan-financing options (bank, company, and friends/relatives) are not very popular among the low-income respondents studied. The dislike for loan financing arrangements is the same across virtually all demographic segments. The most frequently indicated option for monthly mortgage payments is SR 1,000 – SR 1,500. However, a little over 19% of respondents indicate that they can make monthly payments beyond SR 2,500. As is expected, monthly income has an effect on the size of monthly mortgage payments that respondents can afford to make in this study.
IMPLICATIONS OF THE STUDY The above conclusion has strategic management implications for the government, real estate developers and financial institutions because the issue of financing is always central to house purchase. In Saudi Arabia, this is so important it has even been a subject of government policy leading to the establishment of the REDF. Even Saudi King Abdullah reiterated this in his 2011 major address to the nation. He hinted that Saudi Arabia’s Real Estate Development Fund (which provides interest-free loans) will be getting a boast of 40 billion riyals. Another 15 billion riyals has been added to the housing budget to build affordable homes for state employees whilst the homebuilding limit of this fund has been increased from SR300, 000 to SR 500,000 per loan. Although it is still not enough, this financing option has been the most popular among members of the low-income segment studied because it currently dominates the home financing market. This offers opportunities for real estate developers to come up with innovative financing options. Some of the developers in the Kingdom have tried to do this by developing special arrangements with Saudi banks for the
latter to provide the financing for purchases by their customers. But again, it appears that this has not been popular among large sections of the population because of the involvement of banks and interest payments. This therefore calls for the need to creating efficient house financing options that will respect the culture and the local values of Saudis. Through this, countless of citizens will realize their dreams of owning a home of their own. Most of the surveyed consumers are not expected to finance their home purchase or construction through bank loans. Paying by installments to the real estate developer is an option that most of them would consider because majority can afford up to SR 2,500 in monthly payments. This is a healthy amount that should make such a scheme viable. It is therefore recommended that financial institutions and estate developers should study the feasibility of developing a mortgage installment payment scheme that could cater for the low-income segment of the Saudi population. The development of more accessible financial products aimed at low-income people is only a first step. In order to reap the best out of these products, it is imperative that financial managers also take into account the differences in attitudes and values of the low-income group in the same way as other segments of the retail banking customers are approached. For example, results of the study show that many low-income Saudis are also interested in the pure cash payment financing option. One of the ways to accumulate such wealth is to promote savings. To facilitate savings for the low-income group with saving interest, a flexible savings and its related products should be accessible (such as automatic or self-decided savings with no freezing of the funds, no minimal amount and no redemption fees) and offered at a competitive interest rate.
Other categories of loan financing (either from the bank, company, or friends and relatives) are generally least preferred by respondents in the study. However, there was about 43.5% of the sample who were interested somehow in loan financing. For this group of respondents, they need to be reassured in order to main their trust since a lot of Saudis appears to show fears and negative attitudes toward borrowing. In order to meet the need of low-income persons to secure a loan (without being systematically turned down and give them a sense of responsibility toward financial commitments), financial institutions could develop products combining savings and borrowing with a window for borrowing after a preliminary period of savings. There are a lot to gain from by financial institutions and real estate developers which aimed at helping low-income customers. Whilst developing positive feelings toward such institutions, it could also reduce the systematic exclusion of some lowincome people from the financial system (Chéron et al., 1999).
LIMITATIONS OF THE STUDY AND FUTURE RESEARCH The index of low income is a relative measure including a wide range of information. A person can be classified as low income earner based on the size of the family unit, gross annual family income and the area of residence among others. In this study, we only considered present net earnings since Saudi Arabia is a tax-free income economy. We also included students in the sample. This segment could have been excluded due to the transitory economic situation of students. This study also provides a snapshot of low-income Saudi consumers' knowledge of mortgage loans and other financing options and their choice among alternative financing options. Studies on consumer behavior such as this requires a follow up of households over time to see how they react to a variety of different financing options. At the moment, we do not
know how many low-income earners would prefer to own but face serious obstacles to buying a home. This then calls for a longitudinal study to track events over time. With the expansion of low-income house purchase financing options in Saudi Arabia, new research is needed on how the benefits of such options are distributed among developers, nonprofit organizations, and low-income households. It could also be interesting to look at the various financing options and their cost-effectiveness relative to others. Tracking will be required to determine the extent to which home ownership rates will increase in response to the increase in various financing options in Saudi Arabia. A similar study has been conducted in the US (see Quercia et al., 2003). Lastly, analyses of home purchase finance choices in industrialized nations have focused on the attributes of mortgage loans and have not included wider options, e.g., pure cash purchase (Struyk and Roman, 2008). As this study has brought up the importance of cash purchase in Saudi Arabia, it would be worthwhile to conduct studies in similar environments with the view to ascertaining the widespread nature or otherwise of this financing option.
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