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.

The average cost of construction soared in terms of iron prices, amongst other commodities, which have an indirect impact on rentals.

Currency stability

Al Hamed said the decrease in CPI, which measures a basket of more than 490 different goods and services, was due to the improvement in supply chains or as a result of the stability of currency prices, especially the US dollar. Accordingly, prices of many goods and services tumbled.

Al Sheikh stated that stability in commodities and cash contributed to taming the Kingdom’s inflation rate. This is because Saudi Arabia produces a lot of commodities, which led to price stability, while imports have become ineffective on prices. He explained that the key driver for slowed inflation in the Kingdom was the Saudi riyal stability against foreign currencies. SAR helped ensure a reasonable price of imports, which in turn enhanced the stability and slowdown of the inflation rate.

Variance across cities

Al-Raqeeb added that Jeddah reported the highest housing rentals, which climbed by 24.84% on the demolishing of slums and a weak supply of residential units. Riyadh came second with a 15.55% increase, given the accelerating population growth and supply-demand gap.

Elsewhere, Al Sheikh said the variance in inflation rates across Saudi cities was attributed to the high population in terms of demand for real estate. The more the demand, the less the supply amid higher prices and increased competition.

Al Hamed stated that the purchasing power and population density weigh on the inflation index constituents. A clear variance between inflation rates across the major and small cities is logical, given the varying purchasing powers, as well as seasonality and population density.

Food prices

On the other hand, Al-Raqeeb said food and beverages (F&B) prices are a component of the inflation index, impacting people’s lives. In July, F&B grew by 1.37% and 0.45% YoY and MoM, respectively, meaning that food prices are poised to rise amid shortage of supply chains, according to the Food and Agriculture Organization (FAO).

The rest of the index's rising components had a minor impact on consumers that can be mitigated, namely in the restaurants and entertainment sectors. Al Sheikh added that the Kingdom's policy for increasing exports strengthened the Saudi economy, providing an abundant supply of currency and goods. He indicated that the strong economy could imply lower inflation rates. Government support for many goods, either directly or indirectly, and exporters from other countries capitalizing on the Kingdom’s purchasing power, both contributed to the provision of commodities and influences the Saudi citizen's consumption patterns.

Oil prices and relation to inflation

Al Hamed stated that oil prices do not affect inflation as the vast majority of energy prices across the Kingdom are stable, adding that fixing fuel prices supports both the citizens and residents. Al Sheikh shared a similar sentiment, underlining that inflation is hit by other factors. He also added that higher market liquidity is one of the causes of rising inflation, noting that the Saudi Central Bank (SAMA) tackles this aspect in the Kingdom.