The announcement that Saudi Arabia is planning to set up a Fannie Mae-style company, operating like the Federal National Mortgage Association in the US, to buy mortgages from financial institutions, has set the kingdom buzzing with the belief that at last the Saudi property sector will take off. Given the considerable potential of the Saudi housing market, this should also be attractive news to Gulf investors seeking to diversify into property in Saudi Arabia. The proposed company will in effect become the primary purchaser of eligible home loans from institutional issuers. It will have the mandate to securitise these loans into mortgage-backed securities, sell them to investors through Islamic sukuks and create a liquid secondary market. The company, which is due to launch by the end of the year, according to the Saudi finance minister, Ibrahim al Assaf, will come on the heels of the approval of the long-awaited Saudi mortgage law. This has been eagerly awaited by Saudi banks seeking to institutionalise mortgage financing. There is not much first-hand information on the potential size of the Saudi property market. Housing market forecasts and estimates are based on huge projects in the pipeline. Some independent academic studies have been carried out, one of which was by King Fahd University of Petroleum and Minerals, based on input from Saudi developers on existing and planned projects. The study revealed that the value of Saudi projects, excluding individual housing supply carried out by individuals, was an estimated 2.71 trillion Saudi riyals (Dh2.66tn). The study also revealed a large unsatisfied demand for private-sector housing, supported by a young and rising population and still-low home ownership compared with other countries and found that only through the establishment of formal financing mechanisms and specialised property markets could such a demand be met to avoid future social problems. According to a report in Arab News, nearly 60 per cent of Saudis do not own homes. The preliminary results of the 2004 census in Saudi Arabia revealed that the population in the kingdom had increased from 7.01 million in 1974 to 22.67 million in Sept 2004. If the total population continues to grow at 2.45 per cent annually in the next 15 years, according to the census, the kingdom's population is projected to reach 29.62 million by 2015 and 33.44 million by 2020. The Saudi market is driven by demand fundamentals, not by speculation, unlike other GCC countries. The demographic fundamentals, combined with a relatively positive performance by the economy, will sustain the growth in development in the kingdom. In order to meet demand until 2020, according to market estimates, about 2.62 million new homes will need to be built, at an average rate of 163,750 units a year. The housing sector is at the centre of the kingdom's growth. In value terms, the housing sector makes up 75 per cent of all property activity. The desire to own a home remains strong in Saudi society, and banks believes that a supply shortage in affordable low-income housing is a challenge for the financial services industry. The introduction of mortgage products in the coming years will add momentum to the growth of the sector and the government's plan to establish a Saudi "Fannie Mae" will assist in this development. The amounts required are significant and there is a shortage of funding for housing construction, as the majority of financing is through the government-owned Real Estate Development Fund (REDF) and from private savings. According to the study by King Fahd University, using average market prices last year for villas and apartments for Saudi Arabia, the forecast total required value of financing of the expected shortfall in private housing stock will be about 6tn riyals by 2025, and not the 1.31tn riyals the REDF forecasts, which is based on a REDF loan of 300,000 riyals per applicant, a figure which has not changed since it was introduced in the late 1970s. In order to meet future demand at fair market prices, and introduce new liquidity channels, the mortgage finance law needs to be implemented soon. The undersupply situation, a major challenge especially in the affordable low-income segment, is expected to continue for the short to medium term. The introduction of innovative mortgage products after the passing of the mortgage law and the arrival of the planned government mortgage agency will provide a valuable impetus to this fast-growing sector. Dr Mohamed Ramady is a former banker and visiting associate professor, finance and economics, at King Fahd University of Petroleum and Minerals, Dhahran.