Housing takes toll on inflation index: Analysts

Although countries around the world endured sharp hikes in inflation rates as COVID-19 took a toll on their economies, Saudi Arabia’s inflation rate fell to 2.3% in July — the lowest level in more than a year.

A number of analysts polled by Argaam highlighted that housing remains a key influence on the inflation index. Housing market movement and increased demand for housing units in Saudi Arabia contributed to the Kingdom's outstanding economic performance.

They added that inflation in rental rates came as a result of high demand. This created a competitive atmosphere, as landlords tend to raise rental prices amid rising demand.

The General Authority for Statistics (GASTAT) pointed out that the inflation stability was driven by the strength of the Saudi economy, coupled with the great positive impact that resulted from the economic measures taken by the Kingdom at an early stage to face the global rise in inflation rates.

The authority also indicated that inflation rates in Saudi Arabia maintain a reasonable level and are balanced compared to most countries of the world.

Impact of rent and housing items

Meanwhile, Hussein Al-Raqeeb, Director of Zad Consulting Center, said inflation declined on an annual basis in July to 2.31%, but increased by 0.09% on a monthly basis. During the same month, the “housing” item rose by 8.64% year-on-year (YoY) and 0.29% month-on-month (MoM), anchoring its role as a key driver of the inflation index. 

He explained that residential rents leapt 10.33% YoY, maintaining their uptrend and recording a 0.28% MoM growth. Further, apartment rents jumped by 21.13% YoY, and also saw a MoM surge.

Abdullah Al Hamed, Head of Client Investment Advisory at GIB Capital, said rent represents about 21% of Saudi Arabia’s Consumer Price Index (CPI), and significantly affects the final reading of the index. He indicated that the real estate market in the Kingdom is currently witnessing great momentum and high demand for residential units.

He added that increased demand for housing units is deemed a healthy factor for the outstanding economic performance in the Kingdom and the government-private sector efforts to provide more housing backlog that will effectively address supply needs. He expected a decline in real estate prices by year-end or early next year.

Al Hamed said many of the newly-built residential units contribute to increasing supply, while raising price pressures. The Saudi government is seriously working on making commodities available. The Ministry of Finance launched a program to support the imports of key commodities and help merchants keep a sufficient stock.

Further, keeping fuel prices unchanged also contributes to cooling inflation, Al Hamed continued.

Abdulmohsen Al Sheikh, Professor of Economic Studies and Member of the Saudi Economic Association (SEA), said the 10.3% uptick in rent inflation came due to higher demand, particularly in major cities such as Riyadh. Most of the population is turning to major cities to look for offices for new companies or for relocation.