Along for infrastructure growth and other development of

Along the years, expatriates have become part and parcel of the
Saudi society as they work in Saudi offices, firms and homes. In fact,
according to the General Authority for statistics the number of expatriates in
Saudi Arabia has reached 12M in 2017. This dependence on expatriate workers has
started since the oil was discovered in the late 1930s.

Until 2017, Saudi Arabia was considered one of the perfect places
for foreigners to work, where they were offered attractive wages and better
career prospect. Taxes were not imposed on them, but rather they had a chance
to save money or send it back to their families. However, that all changed when
Saudi Arabia has passed several decisions in 2016, among them was the decision
to Impose fees on the expat’s dependents. Therefore, starting from 1st
of July 2017, expats were expected to pay SAR100 for each individual dependent
sponsor’s wife, children, parents, in-laws, maids and drivers registered under
his name) per month. Moreover, this amount will increase by SAR100 annually,
reaching SAR400 per dependent in 2020. The Iqama renewal fee has also increased
from SAR200 per month to SAR300 per month for companies where Saudis outnumber
expats, and SAR400 per month for companies in which the number of expats is
equal or greater than the number of Saudi workers.

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Literature review:

Saudi Arabia has imposed this levy on expats as an attempt to
increase its state’s revenues after it was affected by the low oil prices. This
was imposed to expats on the assumption of creating more wealth to government
treasuries and to utilize the same for infrastructure growth and other development
of the nation. But how does this impact our economy and in our research the
rental house market? This is what we will focus on in this research by covering
both the economic and social aspects.

The backbone of the rental houses is of income from expats. Almost
33% percent of the total population in Saudi Arabia are expats, and almost all
expats are depending on rental houses (like villas, compounds etc.). Therefore,
once the levy has been introduced it has cut down the real income of expats
which will adversely affect consumption pattern of the expats, which in turn
will affect the purchasing power in an economy and this will cause a real cut
down of production, distribution and consumption in the whole economy. As a
result, instead of spending they prefer to hold the money with them., without
public spending the economy cannot flourish.

As the expats have to pay the fees from their current earnings they
will be forced to adopt a new life style. They might leave the country
voluntarily or forcefully or decide to send their families back home and adopt
some cheaper housing with sharing members, the headship will reduce, and this
will adversely affect the rental market. Due to the reverse migration, majority
of the flats and villas remain unoccupied in the competitive market and as the
Aggregate demand goes down, the market tends to reach market equilibrium by
forcing the owners to bring down the rents. Aggregate Supply remains the same
and so this will cause the decrease of profit from rental market.

This research study will throw lights on various areas affecting
the economic impact of expat fees on the rental house market and how long an
economy can cope up with the changing scenario.

According to expert’s opinion, Rental market is usually being
included as SMEs (Small and Medium Enterprises). SMEs are considered to be the
pillars of any world economy. As the headship reduces, it will cause a
reduction of profit from rental Market and the owners may be forced to reduce
the rent, this will have a negative impact on the Economy. The Economy may then
come down to a recession at least for a period of short run and medium.
However, it may have a positive effect on long run period. (Saeed Al-Ghamdi,
Saudi Gazette) 1

Other Prominent economic writer Gassan Badakok, in Arabic daily
newspaper Okaz points out that there are pros and cons for the expat fee.
Merits can be like departing expatriates, with Saudi employees in the
employment market, it can cope with the budget deficit to a certain extent with
the so earned income, reduce the imbalances of demography as the expats
contribute a substantial percentage of the total population, security issues
will also get reduced, citizens dependence on public properties like
electricity, water and fuel will also get reduced.

Demerits of such a law are the revenue generated to the state
coffers with the levy cannot be a good source of investment, this has a
negative impact on the market. It will cut down the purchasing power of
consumers thereby decreasing their standard of living, the native businesses
will also be affected in their profits due to less spending by expats. 2

As per various experts like Abdullah Sadiq Dahlan views on how the
expat fee impact the rental market, the income earned by an expat should be in
a relation so that they can also be able to earn profit from their earnings. As
the expat fees has to be reduced from their real income, it may affect their
savings and this slumber the purchasing power in the whole economy. He also
added that the incentives can boost up people’s production efficiency and it
will affect the overall performance at work, this has a psychological effect on
manpower. As the levy will reduce the income or the savings of the people,
their attitude towards work will also be affected.

This has already been proved when
Saudi Arabia passed a law to freeze the benefits that are being offered to
government servants years back. This in turn affected their morale and there is
a chance that the same will be repeated in the case of expat fees. A tiny drop in
per capita income will affect the purchasing power of the individuals and this
will have a mirror effect in the economy as well. 3

Two examples of the same scenario in other world nations was
that of the impact of tax on foreign buyers in Toronto Housing Market by 2017,
and demand for housing being driven up in United State of America by
Immigrants. Purchases of Toronto homes by foreign buyers dropped over the
summer after a new tax in Ontario began targeting international property
investment, falling from 7.2 percent of sales in May to 5.6 percent of homes
sold over the three months ending in August.

government has passed out a new law in 2017 which affected the Toronto Housing
Market sector adversely. A 15% foreign buyers tax was being introduced for the
housing market. This created a psychological impact on the buyers and there
seemed to be a slumber in the real estate of Toronto housing market after
passing the law. The international as well as the domestic market are really
affected. According to the data from Ontario’s Finance
Ministry at the time the tax was introduced shows that the regions housing
market was at its peak but after the introduction of tax on foreign buyers it fell
down dramatically. 4

Likewise, in the US, immigrants are driving demand
for housing. After the recession in 2010, the homeownership of US born citizens
plummeted while
the immigrants’ homeownership increased than previous years but not as compared
to their counterparts.

According to a research by Gary
Painter (US 2017) the headship rate for immigrants are increasing and the
headship rate of US born citizens are declining as they shrunk to
multigenerational settings. A new report from American Society/Council of
Americas reviews that more immigrants can add higher values to housing sector. 5

Article reviews from various experts like (Dr. Ali Al Ghamdi, Saudi
gazette) also reveals the fact that Expat fee will ultimately reduce the income
of expats to a certain extend and this will cause a decrease of demand for
rental housing. As the demand falls down and the supply remains the same in our
economy, this will force the prices of rental houses to come down. The economy
will move to a state of underutilized resources because the rental houses
remain unoccupied. In developed economies resources are being utilized to its
optimum level. 6

According to a study conducted by Riyadh Chamber of Commerce there
will be an adverse effect on economy because of this expat fee as it’s going to
affect the private sector. New expat tax would impact 20% of house rent, 44% of
accessories business, 38% of services such as electricity and telecom and 34%
of private foreign schools in Saudi Arabia. The reverse migration will be
having a huge impact on the rental market as the expats contribute one third of
the total population. Expat workers and their family occupy some 1.4 million of
the total 4.6 million homes in the kingdom. This will adversely affect the
rental market as the balance of demand and supply in the real estate market
will not be in an equilibrium.  7

Research article published in Financial Tribune by consultancy JLL
reviewed that the reverse migration has reduced the rent of buildings and
apartments by 3% and there is a reduction of about 9% in office rentals. Still
the analysts are considering that the impacts of levy on rental market are not
yet fully assessed and findings have not yet been fool proofed to convince. The
new policy was being introduced to change from an oil dependent economy. the
introduction of levy has to reduce the fiscal deficit of the economy. 8

Another article was published by Tariq Al Maeena, in Financial
Times that by the end of 2018 2.5m expats will be leaving in a total of 33m
country’s population. the expat fees are incrementally increasing in a rate to
contribute to government revenue, but it threatens the rental market, as the
expats may send their families back. This is a radical reform taken by the
kingdom to overcome the dependence of the nation on oil based may
not have an effect on short run and medium term but it has an effect on the
long run. 9

According to a
study of urban Land institute, immigrants are creating demand for housing
industry. The Harvard Joint Centre for Housing Studies estimates that if there
are less immigrants, it can weaken the housing market in the US. Immigrants are
the real demand driving factors in an economy. According to ULI research in the
US, 28% of all household growth in the US comes from Immigrant families.
Homeownership among immigrants are also increasing in US which in turn will
boost up the real estate market .US real estate market shows a positive
relation with the increase of immigrants. 10

Another example
of tax impact on real estate market can be seen in the Indian economy, where
Goods and services tax has been introduced. GST is an indirect tax for the
whole nation and it’s a single tax paid from the manufacturing stage to the
consumption stage. GST has added an effect on the real estate by increasing the
cost of real estate in India. The federal taxes have been removed and GST has
been introduced. So, they will affect the intermediary persons as well as the
purchase and sale of land in India. 11



SWOT analysis is a planning method that was
developed by Albert S Humphrey in the
1960s. It examines the four elements of Strengths, weaknesses, opportunities
and threats that are important to any organization project, organization or
industry. The first are classified as internal factors while the remaining are
external factors. In our study, this will help us determine positive and
negative impacts of the expatriate fees, long term opportunities and general


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