Along the years, expatriates have become part and parcel of theSaudi society as they work in Saudi offices, firms and homes. In fact,according to the General Authority for statistics the number of expatriates inSaudi Arabia has reached 12M in 2017. This dependence on expatriate workers hasstarted since the oil was discovered in the late 1930s.Until 2017, Saudi Arabia was considered one of the perfect placesfor foreigners to work, where they were offered attractive wages and bettercareer prospect. Taxes were not imposed on them, but rather they had a chanceto save money or send it back to their families. However, that all changed whenSaudi Arabia has passed several decisions in 2016, among them was the decisionto Impose fees on the expat’s dependents.
Therefore, starting from 1stof July 2017, expats were expected to pay SAR100 for each individual dependent(includingsponsor’s wife, children, parents, in-laws, maids and drivers registered underhis name) per month. Moreover, this amount will increase by SAR100 annually,reaching SAR400 per dependent in 2020. The Iqama renewal fee has also increasedfrom SAR200 per month to SAR300 per month for companies where Saudis outnumberexpats, and SAR400 per month for companies in which the number of expats isequal or greater than the number of Saudi workers.Literature review:Saudi Arabia has imposed this levy on expats as an attempt toincrease its state’s revenues after it was affected by the low oil prices. Thiswas imposed to expats on the assumption of creating more wealth to governmenttreasuries and to utilize the same for infrastructure growth and other developmentof the nation. But how does this impact our economy and in our research therental house market? This is what we will focus on in this research by coveringboth the economic and social aspects.The backbone of the rental houses is of income from expats.
Almost33% percent of the total population in Saudi Arabia are expats, and almost allexpats are depending on rental houses (like villas, compounds etc.). Therefore,once the levy has been introduced it has cut down the real income of expatswhich will adversely affect consumption pattern of the expats, which in turnwill affect the purchasing power in an economy and this will cause a real cutdown of production, distribution and consumption in the whole economy.
As aresult, instead of spending they prefer to hold the money with them., withoutpublic spending the economy cannot flourish.As the expats have to pay the fees from their current earnings theywill be forced to adopt a new life style. They might leave the countryvoluntarily or forcefully or decide to send their families back home and adoptsome cheaper housing with sharing members, the headship will reduce, and thiswill adversely affect the rental market. Due to the reverse migration, majorityof the flats and villas remain unoccupied in the competitive market and as theAggregate demand goes down, the market tends to reach market equilibrium byforcing the owners to bring down the rents. Aggregate Supply remains the sameand so this will cause the decrease of profit from rental market.This research study will throw lights on various areas affectingthe economic impact of expat fees on the rental house market and how long aneconomy can cope up with the changing scenario.
According to expert’s opinion, Rental market is usually beingincluded as SMEs (Small and Medium Enterprises). SMEs are considered to be thepillars of any world economy. As the headship reduces, it will cause areduction of profit from rental Market and the owners may be forced to reducethe rent, this will have a negative impact on the Economy. The Economy may thencome 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) 1Other Prominent economic writer Gassan Badakok, in Arabic dailynewspaper Okaz points out that there are pros and cons for the expat fee.
Merits can be like departing expatriates, with Saudi employees in theemployment market, it can cope with the budget deficit to a certain extent withthe so earned income, reduce the imbalances of demography as the expatscontribute a substantial percentage of the total population, security issueswill also get reduced, citizens dependence on public properties likeelectricity, water and fuel will also get reduced.Demerits of such a law are the revenue generated to the statecoffers with the levy cannot be a good source of investment, this has anegative impact on the market. It will cut down the purchasing power ofconsumers thereby decreasing their standard of living, the native businesseswill also be affected in their profits due to less spending by expats. 2As per various experts like Abdullah Sadiq Dahlan views on how theexpat fee impact the rental market, the income earned by an expat should be ina relation so that they can also be able to earn profit from their earnings.
Asthe expat fees has to be reduced from their real income, it may affect theirsavings and this slumber the purchasing power in the whole economy. He alsoadded that the incentives can boost up people’s production efficiency and itwill affect the overall performance at work, this has a psychological effect onmanpower. 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 whenSaudi Arabia passed a law to freeze the benefits that are being offered togovernment servants years back. This in turn affected their morale and there isa chance that the same will be repeated in the case of expat fees. A tiny drop inper capita income will affect the purchasing power of the individuals and thiswill have a mirror effect in the economy as well. 3Two examples of the same scenario in other world nations wasthat 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 byImmigrants.
Purchases of Toronto homes by foreign buyers dropped over thesummer after a new tax in Ontario began targeting international propertyinvestment, falling from 7.2 percent of sales in May to 5.6 percent of homessold over the three months ending in August.Canadagovernment has passed out a new law in 2017 which affected the Toronto HousingMarket sector adversely. A 15% foreign buyers tax was being introduced for thehousing market. This created a psychological impact on the buyers and thereseemed to be a slumber in the real estate of Toronto housing market afterpassing the law.
The international as well as the domestic market are reallyaffected. According to the data from Ontario’s FinanceMinistry at the time the tax was introduced shows that the regions housingmarket was at its peak but after the introduction of tax on foreign buyers it felldown dramatically. 4Likewise, in the US, immigrants are driving demandfor housing. After the recession in 2010, the homeownership of US born citizensplummeted whilethe immigrants’ homeownership increased than previous years but not as comparedto their counterparts. According to a research by GaryPainter (US 2017) the headship rate for immigrants are increasing and theheadship rate of US born citizens are declining as they shrunk tomultigenerational settings. A new report from American Society/Council ofAmericas reviews that more immigrants can add higher values to housing sector.
5Article reviews from various experts like (Dr. Ali Al Ghamdi, Saudigazette) also reveals the fact that Expat fee will ultimately reduce the incomeof expats to a certain extend and this will cause a decrease of demand forrental housing. As the demand falls down and the supply remains the same in oureconomy, this will force the prices of rental houses to come down. The economywill move to a state of underutilized resources because the rental housesremain unoccupied. In developed economies resources are being utilized to itsoptimum level. 6According to a study conducted by Riyadh Chamber of Commerce therewill be an adverse effect on economy because of this expat fee as it’s going toaffect the private sector. New expat tax would impact 20% of house rent, 44% ofaccessories business, 38% of services such as electricity and telecom and 34%of private foreign schools in Saudi Arabia. The reverse migration will behaving a huge impact on the rental market as the expats contribute one third ofthe total population.
Expat workers and their family occupy some 1.4 million ofthe total 4.6 million homes in the kingdom. This will adversely affect therental market as the balance of demand and supply in the real estate marketwill not be in an equilibrium. 7Research article published in Financial Tribune by consultancy JLLreviewed that the reverse migration has reduced the rent of buildings andapartments by 3% and there is a reduction of about 9% in office rentals. Stillthe analysts are considering that the impacts of levy on rental market are notyet fully assessed and findings have not yet been fool proofed to convince. Thenew policy was being introduced to change from an oil dependent economy.
theintroduction of levy has to reduce the fiscal deficit of the economy. 8Another article was published by Tariq Al Maeena, in FinancialTimes that by the end of 2018 2.5m expats will be leaving in a total of 33mcountry’s population. the expat fees are incrementally increasing in a rate tocontribute to government revenue, but it threatens the rental market, as theexpats may send their families back. This is a radical reform taken by thekingdom to overcome the dependence of the nation on oil based economy.it maynot have an effect on short run and medium term but it has an effect on thelong run. 9According to astudy of urban Land institute, immigrants are creating demand for housingindustry. The Harvard Joint Centre for Housing Studies estimates that if thereare less immigrants, it can weaken the housing market in the US.
Immigrants arethe real demand driving factors in an economy. According to ULI research in theUS, 28% of all household growth in the US comes from Immigrant families.Homeownership among immigrants are also increasing in US which in turn willboost up the real estate market .US real estate market shows a positiverelation with the increase of immigrants. 10Another exampleof tax impact on real estate market can be seen in the Indian economy, whereGoods and services tax has been introduced. GST is an indirect tax for thewhole nation and it’s a single tax paid from the manufacturing stage to theconsumption stage. GST has added an effect on the real estate by increasing thecost of real estate in India. The federal taxes have been removed and GST hasbeen introduced.
So, they will affect the intermediary persons as well as thepurchase and sale of land in India. 11 SWOTAnalysis:SWOT analysis is a planning method that wasdeveloped by Albert S Humphrey in the1960s. It examines the four elements of Strengths, weaknesses, opportunitiesand threats that are important to any organization project, organization orindustry. The first are classified as internal factors while the remaining areexternal factors. In our study, this will help us determine positive andnegative impacts of the expatriate fees, long term opportunities and generalthreats.