On October 2nd, 2020  Saudi Arabia’s king issued an order exempting real estate deals from a 15% VAT and imposed a new 5% tax on transactions as the Gulf state moves to revitalize an economy hit by low oil prices and the COVID-19 pandemic.

The country is facing a deep recession, with the economy shrinking by 7% in the second quarter and unemployment hitting a record high of 15.4%.

The government had in July tripled VAT to 15% to boost non-oil revenues, but the move has limited domestic demand.

Mohammed al-JADAAN, the Saudi Finance Minister wrote on Twitter: “The royal order aims to support citizens and ease their burden … and enable them to own homes, and helps develop the kingdom’s economy by spurring the residential and commercial property sector”.

Mohammed bin SALMAN, the Crown Prince, has launched an ambitious plan to diversify the economy and create jobs for millions of Saudis.

According to the order, the government would bear the cost of the new Real Estate Transaction Tax “for up to $266,616 (1 million riyals)” for Saudi citizens purchasing their first home.

Despite the headwinds facing the Kingdom’s real estate sector, mortgages in Saudi Arabia have surged this year with the number and value of home loans issued in the eight months to August exceeding all of last year. Demand for home loans is also spurring the growth of Islamic finance according to Moody’s, the credit ratings agency.

“Mortgages, a key consumer finance product, have been a key driver of Islamic finance expansion over the past few years, and will remain an engine of growth,” it said in a report this week. “Despite fiscal austerity measures now in place, mortgage demand is strong, product offerings have improved and home valuations have become more affordable”.

The housing minister said the move would help achieve a target of boosting housing ownership by Saudis to 70% percent by 2030 in a country with an overwhelmingly young population.

During the second quarter of this year, the average cost of residential properties in Riyadh rose by 3.5 percent from last year, while average rental rates fell by 1 percent, according to a JLL (Jones Lang LaSalle) report on Saudi Arabia’s property sector.

“The decision to levy a 5 percent property transaction tax, rather than apply 15 percent VAT, should serve to support the market and is consistent with a long-term government policy of increasing homeownership” Chris HOBDEN, associate director and head of strategic consultancy at Chestertons Mena, told The National.

This article was edited using the data from the Aljazeera.com, Thenational.ae, Economictimes.indiatimes.com, and Arabnews.com.