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Royal revolution in the House of Saud: Part 6, The culture of not acting

1 and the preceding Part 12, Part 23, Part 34 and Part 45.]

By: David A. Smith6

Though I haven t talked with any Saudis in a year or so, I suspect that when King Salman first announced his new housing minister and the proposal to tax white lands, stakeholders were skeptical.

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

Given past performance, to expect action would be illogical

So little had come previously of the late King Abdullah s 500,000 home pledge, and his $67 billion appropriation for it. Why would now be any different?

Sources used in this post

Al-Monitor (January 31, 2014; ginger font)7

Reuters (March 12, 2015; forest green font)8

Reuters (March 24, 2015; shamrock font)9

Mubasher KSA (April 27, 201510, seaweed font)

Reuters (October 5, 2015; sapphire font)11

Reuters (October 19, 2015; indigo font)12

Reuters (November 22, 2015; pickle font)13

Trade Arabia (November 22, 2015; parakeet font)14

The National (November 30, 2015; aegean font)15

Other AHI posts about Saudi Arabia or Gulf housing issues

Sovereign bankruptcy: December 7, 2009, 5 parts): Insolvency of Dubai World16

The invisible army (November 25, 2013, 6 parts): Saudi s expatriate workforce17

Taking their economy with them (January 28, 2014, 4 parts): Expulsion of illegal workers18

Expressive of this attitude was Abdallah Ben Rubeian s Al-Monitor article:

It seems that allocating 250 billion Saudi riyals $67.5 billion to support housing projects and solve the housing crisis in Saudi Arabia has been ineffective and inadequate. While many promises have been made, all that the ministry has done to date does not suggest that the housing crisis will be solved anytime soon. 19

By always focusing on the demand side rather than the supply side, Saudi housing policies are making the housing situation worse.

While Mr.

Ben Rubeian s analysis is unusually insightful, his general discontent is reflective, I believe, of the disillusionment most ordinary Saudis felt about their housing situation.

By signing with commercial banks to give a citizen an additional loan and by accelerating the spending of the real estate loan fund, the ministry has poured oil on the fire.

As we ve discussed before, land value is a residual the value of urban land is the output function of ability to pay rising faster than availability of buildable land. 2021

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

And (unless zoning is used to shape the market) housing is adversely selected: it s usually a less profitable use of land than commercial or retail, and affordable housing is less profitable than luxury housing; and slums are the least-valuable use of urban land.222324

Even in a reasonably fluid and responsive land and property markets, land prices spike periodically basically when the pace of urbanization outruns the pace of development. But when the supply is artificially restricted (as in the UK; see graphic below), then price spikes become permanent, and even self-reinforcing.2526

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

It s not due to population growth: annual increases in home prices, UK

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

Construction costs grow normally: land is the volatile commodity27

In the West, our land restrictions are NIMBYist zoning or development barriers, imposed by eco-populists either ignorant of land-use economics or indifferent to exclusion. 28293031

In Saudi Arabia, land restrictions are imposed by the oligarchs, who simply hold land off the market, because it takes no thinking and no acting to do so.

In 2013, the Housing Ministry estimated that 40% of the land in Riyadh was made up of empty plots, at a time when the kingdom has announced plans to build 1.5 million units.

The cartel need not even be a conspiracy, merely a collective monopoly of people who each act in like-situated self-interest. Whatever the cause, the land crisis that s not an overstatement is only worsening in Saudi Arabia:

However, Al Faraj said that the ratio had risen to 49% in Riyadh, 50% in Dammam and 40% in Jeddah.

Whenever there s a shortage of development land, be it in the USA or the KSA, the consequences of development shortages are borne not by the plutocrats but by the middle and lower classes. And pumping free money into the system just pushes up land prices, then flows through to the oligarchs without housing the bourgeoisie.

The housing ministry supported the demand side without a successful solution to the problem: the supply side.

The ministry has been working for four years on a trial-and-error basis, which is not the way to resolve the prolonged crisis. Both the ministry s policies and programs currently support the demand side and ignore the core and essence of the problem: the supply side.

That is spot-on.

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

Well spotted

Market reality has shown that every policy taken by the ministry ended up raising land prices. If those policies continue without solving the demand reality, not 250 billion riyals, nor even more than that, nor tying people up with mortgages, will solve the problem.

Fifth and finally, the ministry postponed the solution to the supply side by considering taxes on empty land within city limits. The ministry has talked about that repeatedly for more than a year i.e.

since early 2013.

Nothing suggests that such a tax will soon be imposed.

Imagine then the surprise of millions of ordinary Saudis, and thousands of Saudi princes, when eighteen months later the government recommended just that (Reuters, 19 October 2015; indigo font):32

According to state news agency SPA. Saudi Arabia s recently installed housing minister said on Monday the cabinet has submitted a proposal to the Shura council to impose a fee

Six months earlier, the King had announced tax was coming, and allowed half a year for the intense offstage lobbying sure to follow.

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

Doubtless it s more refined in Riyadh:

The marketplace of politics: The lobby outside Parliament, 1886

of no more than 100 riyals ($26.67) per square meter on undeveloped lands,

Four things are immediately apparent about the size of that fee:

1. It s big enough to notice. Land prices in Jeddah appear to range from SAR 2,240 to SAR 10,000 per square meter. Apartments in Riyadh cost SAR 2,000-3,000 per square meter outside the city center, SAR 4,000-6,000 in it, and if we assume that land is 50% of the apartment s value (land is costly in Saudi), that translates into Riyadh land values of SAR 1,000-3,000. 3334

The Shura Council is expected to complete its study of the proposal within 30 days, Hogail said, but it was not immediately clear when the new measures would take effect.

For convenience of Western readers, that translates into roughly $25 per square foot of land, or $1,080,000 per acre.

Oh that got your attention, didn t it?

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

A million bucks an acre got your attention, didn t it?

2. It s a flat sum, not proportional to value, and thus regressive. That makes it regressive, because it will hit owners of lower-value property more than it hits higher-value property owners. Such an approach is bass-ackwards (a downside), but has the upside of being incredibly simple to administer, and to avoid all the arguments about assessed property values that invariably arise once an ad valorem approach is used.3536

3. It s a substantial amount and will motivate activity. If the land value I cited are anything indicative, then a tax of SAR 100 per square meter works out to 3.3% to 10% of the land s value. Those figures are high enough I suspect my own arithmetic or choice of sites

Much urban land in the kingdom is owned by wealthy individuals or companies who prefer holding it as a store of value, or trading it for speculative profits, as opposed to developing it.

Saudi Arabia became rich not by its own entrepreneurial activity but rather by granting licenses to foreign entrepreneurs. One can imagine that philosophy of letting others work the land would carry over from subsurface (drilling) to surface (agriculture) to built-environment (development). Why act when others will pay you not to act?

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

That s a lot of vacant land

Indeed, this tidbit (from a later article) suggests that rich Saudis have been using undeveloped land as a form of currency, buying and selling it while it remained undeveloped:

Since most of them use land as an investment, the plots are traded multiple times, inflating prices and disconnecting the land from its development value.

The result, as I mentioned before, is a nightmare for urban planners, and more importantly, for ordinary Saudis, who could not find quality housing even as they drove past site after site that would hold housing if only it could be put into development.

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

Why parking lots amid downtown Riyadh?

Why not? They re untaxed

The tax could change that and spur home building activity.

Minister of Housing Majed Al Hogail said the fees would encourage landowners to develop their land and to provide lands of different and appropriate sizes for different segments of the society .

4. It s suspiciously round. Political gamesmanship figured in its setting. (a) The framing, riyals per square meter, was aimed at the common Saudi, who was expected to say, That sounds fair. (b) When calculated out, it produces a high number, so very likely the government expects it might be eased at the very end.

Such lobbying as there must have been was packed densely into that thirty day interval, because a month later, the Shura Council had completed its analysis and endorsed a proposal (Reuters, 22 November 2015; pickle font):37

Saudi Arabia s Shura Council, the body that advises the government on legislation, has endorsed a tax on undeveloped land aimed at encouraging development and solving a housing crisis, the state-affiliated Al Riyadh newspaper reported last week.

But the Shura Council didn t rubber-stamp what came into it; the members made one significant change:

Royal Revolution In The House Of Saud: Part 6, The Culture Of Not Acting

There s just one more thing

Continued tomorrow in Part 7.]


  1. ^ Part 5 (affordablehousinginstitute.org)
  2. ^ Part 1 (affordablehousinginstitute.org)
  3. ^ Part 2 (affordablehousinginstitute.org)
  4. ^ Part 3 (affordablehousinginstitute.org)
  5. ^ Part 4 (affordablehousinginstitute.org)
  6. ^ David A.

    Smith (www.affordablehousinginstitute.org)

  7. ^ Al-Monitor (January 31, 2014 (www.al-monitor.com)
  8. ^ Reuters (March 12, 2015 (www.arabianbusiness.com)
  9. ^ Reuters (March 24, 2015 (www.arabianbusiness.com)
  10. ^ Mubasher KSA (April 27, 2015 (english.mubasher.info)
  11. ^ Reuters (October 5, 2015 (www.arabianbusiness.com)
  12. ^ Reuters (October 19, 2015 (www.arabianbusiness.com)
  13. ^ Reuters (November 22, 2015 (www.arabianbusiness.com)
  14. ^ Trade Arabia (November 22, 2015 (www.tradearabia.com)
  15. ^ The National (November 30, 2015 (www.thenational.ae)
  16. ^ Sovereign bankruptcy: December 7, 2009 (affordablehousinginstitute.org)
  17. ^ The invisible army (November 25, 2013 (affordablehousinginstitute.org)
  18. ^ Taking their economy with them (January 28, 2014 (affordablehousinginstitute.org)
  19. ^ housing crisis (www.al-monitor.com)
  20. ^ land value is a residual (affordablehousinginstitute.org)
  21. ^ the value of urban land is the output function (affordablehousinginstitute.org)
  22. ^ housing is adversely selected (affordablehousinginstitute.org)
  23. ^ affordable housing is less profitable (affordablehousinginstitute.org)
  24. ^ the least-valuable use of urban land (affordablehousinginstitute.org)
  25. ^ land prices spike periodically (www.independent.ie)
  26. ^ as in the UK (www.thisismoney.co.uk)
  27. ^ land is the volatile commodity (www.millersamuel.com)
  28. ^ our land restrictions (affordablehousinginstitute.org)
  29. ^ are NIMBYist zoning or development barriers (affordablehousinginstitute.org)
  30. ^ imposed by eco-populists (affordablehousinginstitute.org)
  31. ^ either ignorant of land-use economics or indifferent to exclusion (affordablehousinginstitute.org)
  32. ^ Reuters, 19 October 2015 (www.arabianbusiness.com)
  33. ^ Land prices in Jeddah appear to range (olx.sa.com)
  34. ^ Apartments in Riyadh cost (www.numbeo.com)
  35. ^ the arguments about (affordablehousinginstitute.org)
  36. ^ assessed property values (affordablehousinginstitute.org)
  37. ^ Reuters, 22 November 2015 (www.arabianbusiness.com)
  38. ^ Part 7 (affordablehousinginstitute.org)

Reference Root Document:
Royal revolution in the House of Saud: Part 6, The culture of not acting

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