SAMA Rate Cuts Impact on Housing: Six Consecutive Reductions and Market Response

SAMA Rate Cuts Impact on Housing: Six Consecutive Reductions and Market Response

Six consecutive rate cuts from August 2024 to December 2025 reduced SAMA’s repo rate by 100 basis points from 5.50 percent to 4.25 percent — the lowest level in over three years. These reductions, mirroring the US Federal Reserve’s easing cycle due to the SAR-USD currency peg, represent the most sustained monetary easing cycle in Saudi Arabia’s recent history and have produced complex, sometimes contradictory effects on the Kingdom’s housing market and homeownership programme.

The Rate Cutting Timeline

The easing cycle began with a 50 basis-point cut in September 2024, reducing the repo rate from 6.00 percent to 5.50 percent and the reverse repo from 5.50 percent to 5.00 percent. This initial outsized cut signalled the beginning of a sustained easing phase. Subsequent cuts followed in measured 25 basis-point increments: September 2025 to 4.75 percent, October 2025 to 4.50 percent, and December 2025 to 4.25 percent, with the reverse repo declining in parallel to 3.75 percent. Since December 2025, key interest rates have been maintained unchanged, providing policy stability that allows market participants to incorporate the new rate environment into financial planning.

The cumulative 100 basis-point reduction represents a significant shift in the cost of capital for the Saudi economy. For the housing sector — which accounts for nearly 30 percent of total bank credit through SAR 951.3 billion in real estate loans outstanding by end of 2025 — the rate trajectory directly affects borrowing costs, buyer purchasing power, and the economics of housing development.

Direct Impact on Sakani Beneficiaries

For Sakani beneficiaries with partial REDF coverage, each rate cut directly reduces out-of-pocket financing costs. The REDF subsidy structure covers profit amounts on up to SAR 500,000 in financed amount, with support rates ranging from 35 percent to 100 percent depending on income and family size. For families with incomes above SAR 14,000 per month who receive partial coverage (35-99 percent), rate cuts reduce the unsubsidised portion of their financing cost.

Consider a family with SAR 18,000 monthly income receiving 60 percent REDF profit coverage on a SAR 700,000 mortgage. The uncovered 40 percent of financing profits represents their out-of-pocket cost. A 100 basis-point reduction in the underlying rate decreases this out-of-pocket amount by approximately SAR 700-1,000 per year — modest in absolute terms but significant for families at the margin of affordability. Over a 20-year financing period, the cumulative savings reach SAR 14,000-20,000.

For beneficiaries with monthly income of SAR 14,000 or less who receive 100 percent REDF profit coverage, rate cuts do not directly affect their financing costs — the government absorbs the full profit amount regardless of the rate level. Instead, rate cuts reduce the government’s subsidy cost per beneficiary, potentially freeing fiscal capacity to serve additional families.

Private-Market Borrower Impact

For private-market borrowers outside the Sakani subsidy system, the cumulative 100 basis-point reduction translates to approximately SAR 50,000-60,000 in total savings on a SAR 500,000 mortgage over 20 years. On larger mortgages common in Riyadh — where apartment prices have surged 82 percent since 2019 — the savings scale proportionally. A SAR 1 million mortgage at the new 4.25 percent rate versus the prior 5.50 percent rate saves approximately SAR 100,000-120,000 over the financing period.

These savings affect purchasing power directly. Lower rates allow borrowers to qualify for larger mortgages within SAMA’s debt-to-income limits — 55 percent of total monthly income for standard borrowers and 65 percent for housing programme beneficiaries. A borrower with SAR 20,000 monthly income who was constrained to a SAR 700,000 mortgage at 5.50 percent may qualify for SAR 770,000-800,000 at 4.25 percent, expanding the range of properties within reach.

The reduced down payment requirements further amplify rate cut effects. First-time buyers need only 10 percent down (reduced from 15 percent in 2018), and REDF beneficiaries need only 5 percent on properties valued at SAR 800,000 or less. Combined with lower monthly payments from rate cuts, the total acquisition barrier — down payment plus monthly obligation — has declined materially since 2024.

The Origination Paradox

Despite improved rates, new residential mortgage originations fell 11 percent in 2025 — to 108,795 contracts valued at SAR 80.42 billion, compared to 2024’s SAR 91.1 billion (which itself represented a 17 percent rise with 18.9 percent growth in contract numbers). December 2025 origination of SAR 5.55 billion compared to SAR 11.94 billion in December 2024 — a decline exceeding 53.5 percent. November 2025 saw the year’s lowest monthly value at SAR 4.47 billion.

This paradox — lower rates coinciding with lower origination — suggests that price levels and market sentiment are as influential as borrowing costs in determining housing demand. Riyadh’s 82 percent apartment price increase since 2019 and 10.6 percent year-on-year residential price growth in Q2 2025 have stretched affordability beyond what rate cuts alone can resolve. When property prices rise faster than rate cuts reduce monthly payments, the net effect on affordability can be neutral or negative.

The 31 percent year-on-year decline in Riyadh transaction volumes during H1 2025 reinforces this interpretation. Buyers appear to be exercising caution — waiting for prices to moderate or for rate cuts to fully translate into lower available mortgage rates from banks, which typically adjust product pricing with a lag behind SAMA policy rate changes.

The 2024 pattern provides contrast: mortgage origination rose 17 percent with 18.9 percent contract growth, coinciding with the beginning of the rate cutting cycle but before Riyadh’s price corrections. This suggests that rate cuts are more effective in stimulating demand when they coincide with stable or moderating prices — a condition that may be emerging in late 2025 as the residential sector price index declined 2.24 percent during the year.

Transmission Mechanism: SAMA to Banks to Borrowers

The rate cut transmission from SAMA policy rates to end-borrower mortgage rates involves several steps, each with potential friction. SAMA’s repo rate sets the floor for interbank lending, which influences banks’ cost of funds. Banks then determine their mortgage product rates based on cost of funds, credit risk assessment, competitive dynamics, and margin targets.

Saudi banks have not uniformly passed through the full 100 basis-point reduction to mortgage borrowers. Competitive dynamics vary by institution — Al Rajhi Bank, the largest mortgage originator with SAR 10.8 billion in SRC portfolio agreements, has different pricing strategies than smaller banks. Some banks have absorbed part of the rate reduction into wider margins, particularly during the 2025 origination dip when volume pressures reduced competitive pressure to lower rates aggressively.

SRC’s refinancing activities affect this transmission. By purchasing mortgage portfolios from banks — SRC’s refinancing deals exceed SAR 12 billion with 85 percent growth — SRC provides banks with liquidity and reduces balance sheet concentration. This should, in theory, enable banks to originate new mortgages at lower rates. The SAR 75 billion five-year refinancing target and the RMBS programme create structural channels for this balance sheet recycling.

Interaction with Other Policy Instruments

Rate cuts operate within a broader policy environment that includes supply-side, regulatory, and fiscal interventions. Understanding the rate cuts’ housing impact requires examining these interactions.

The Riyadh rent freeze enacted September 2025 freezes rents at 2025 levels for five years. For families deciding between renting and buying, the rent freeze reduces the urgency to purchase — if rent is frozen, the financial pressure to transition to ownership diminishes. This may partially explain the origination dip: families who would have purchased to escape rising rents now face stable rental costs that reduce the ownership premium.

Conversely, the rent freeze protects tenants’ savings capacity. Families paying frozen rents can save more toward down payments, positioning them for purchases in future periods when rate cut effects may have more fully transmitted to bank product pricing. The net effect depends on whether the savings-accumulation benefit outweighs the reduced-urgency effect.

The White Land Tax reform with rates up to 10 percent on vacant plots is designed to increase housing supply, which would moderate prices and amplify rate cuts’ affordability impact. But the 3-5 year land-to-housing conversion timeline means this supply effect is delayed relative to the immediate rate environment.

NHC’s launch of 134,000 new units in 2025 valued at SAR 100 billion, combined with ROSHN’s community pipeline and the Chinese developer agreement for 100,000 homes in 2026, represent supply-side expansion that, when combined with lower rates, creates conditions for improved affordability. The question is timing: supply delivery in 2026-2027 combined with the current rate environment may produce the affordability improvement that 2025 alone could not.

The Federal Reserve Tether

SAMA’s rate policy remains structurally tethered to the US Federal Reserve through the SAR-USD currency peg. This means SAMA cannot independently calibrate rates for domestic housing market conditions. If the Fed pauses or reverses rate cuts for US-specific reasons — inflation concerns, labour market conditions, or financial stability considerations — SAMA would likely follow, regardless of whether further cuts would benefit Saudi housing.

Since December 2025, SAMA has maintained rates unchanged, reflecting the Fed’s parallel pause. If the Fed resumes cutting in 2026, SAMA would likely follow, providing additional tailwind for housing affordability. If the Fed holds or tightens, SAMA’s housing-supportive rate environment would be maintained at current levels rather than improving further.

This structural constraint means that the 100 basis-point reduction from 5.50 to 4.25 percent may represent the full extent of rate-driven affordability improvement available to the housing programme. Further affordability gains would need to come from supply-side moderation of prices, expanded subsidy programmes, or structural reforms to housing costs — channels that the government is pursuing through the NHC, white land tax, and Sakani programme amendments.

2026 Outlook

Jadwa Investment expects demand for mortgage financing to gradually improve during 2026, supported by declining interest rates and greater availability of housing options. This outlook aligns with the expectation that the 2025 origination dip was a temporary recalibration rather than a structural decline. Several factors support this view.

First, the rate environment has improved materially — 4.25 percent represents the most affordable borrowing conditions in three years. Second, the residential sector price index’s 2.24 percent decline in the year to Q4 2025 suggests price moderation is underway, reducing the price barrier that offset rate cut benefits in 2025. Third, housing supply expansion from NHC’s 134,000 launched units, the Chinese developer agreement, and ongoing ROSHN delivery will increase the number of available units, expanding buyer choice and potentially creating competitive pricing.

The mortgage market’s overall target of SAR 1.3 trillion by 2030 — up from SAR 951.3 billion at end of 2025 — requires approximately SAR 70 billion in annual net mortgage growth. Rate cuts support this growth by improving borrower economics, but achieving the target also requires continued expansion of the origination infrastructure, including SRC refinancing, RMBS development, and the Dhamanat guarantee programme.

Assessment

The 100 basis-point rate cutting cycle has improved borrowing economics for both Sakani beneficiaries and private-market borrowers, but its housing market impact has been muted by elevated price levels that offset affordability gains from lower rates. The origination paradox — falling volumes despite falling rates — demonstrates that rate policy alone cannot drive housing market outcomes when prices have appreciated 82 percent in six years. The rate cuts’ true impact will materialise as a compound effect: lower rates plus moderating prices plus expanded supply in 2026-2027 may produce the affordability convergence that the housing programme requires to close the final 4.6 percentage-point homeownership gap.

Housing Supply Interaction

Rate cuts also affect the supply side of the housing market. Lower borrowing costs reduce construction financing expenses for developers, improving project economics and potentially enabling developments that were marginal at higher rates. NHC’s 134,000 new units launched in 2025, the Chinese developer agreement for 100,000 homes in 2026, and ROSHN’s community pipeline all benefit from reduced construction financing costs as rates decline.

The White Land Tax reform with progressive rates up to 10 percent on vacant plots creates supply-side pressure that rate cuts complement. As white land tax forces land into the development pipeline, lower rates reduce the financing costs of converting that land into housing — a compound effect that accelerates the supply response. The 411 million square metres of identified vacant land across Riyadh, Jeddah, Makkah, and Dammam could yield substantially more housing units when development is financed at 4.25 percent versus 5.50 percent.

For tracking, see Mortgage Market Dashboard, SAMA Interest Rate Policy, Mortgage Market Outlook 2026, LTV and DTI Regulations, Affordability Gap Analysis, Sakani Programme, Homeownership Trajectory Analysis, SRC Company Profile, and SAMA Housing Role.