Saudi and consumption in the whole economy. As a

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. This research study
will shed some light 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.

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 the consumption pattern, thus
affect the purchasing power 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 their money, without public spending the economy
cannot flourish.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

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 negatively 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.

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 decrease
in the 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 fall in
a recession at least for a period of short run and medium. However, it may have
a positive effect on the long run. (Saeed Al-Ghamdi, Saudi Gazette) 1

Other Prominent economic writer Gassan Badakok, in Arabic daily
newspaper Okaz states that there are positives merits and demerits for the
expat fee. Merits can be like expats leaving the country which will create more
jobs for Saudis, it can cope with the budget deficit to a certain extent with
the so earned income, reduce the imbalances of demography, security issues will
also get reduced, citizens dependency 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