In recent weeks, Riyadh has witnessed a notable decline in land values, particularly affecting large undeveloped parcels exceeding 5,000 meters.

This downward trend has been, in significant part, attributed to the new taxation policy targeting land alone, which, while aiming to encourage development and reconstruction of new houses, has inadvertently diminished after-tax returns for landowners, leading to reduced land attractiveness and value.

This challenge, which was confirmed by Saudi officials and our own observations, presents a unique opportunity to rethink and innovate in the realm of land taxation.

Drawing inspiration from international experiences and grounded economic theory, we propose a novel taxation approach designed to reinvigorate the land market and stimulate development over the mid-term. (Lincoln Institute of Land Policy).

This approach is called the two-rate property tax system. It’s about raising the tax rate on land while lowering the tax rate on buildings as we explain later in this analysis.

This approach builds on the principle that taxing land in isolation, especially at elevated rates, can suppress land value, as owners bear heavier financial burdens without corresponding relief on improvements, thereby reducing incentives for development.


In August, the Ministry of Municipal and Rural Affairs and Housing announced the geographic zones for the white land fees in Riyadh. (Argaam, Sept 2005).

The annual fee percentage due on a white land plot (or group of plots) located within these zones is set as follows:

● Tier One (highest priority): An annual fee of 10% of the land’s value.
● Tier Two (high priority): An annual fee of 7.5% of the land’s value.
● Tier Three (medium priority): An annual fee of 5% of the land’s value.
● Tier Four (low priority): An annual fee of 2.5% of the land’s value.
● Tier Five (outside priority zones): No annual fee is imposed, but such lands are counted within the total white land holdings of the taxpayer inside the city limits.

The land area, or the total area of lands owned within the city, must not be less than 5,000 square meters. The land must be developable or suitable for immediate use, with basic services available.
 

 

0.5% Value Surge per Acre

Implementing a two-rate property tax system—raising the tax rate on land while lowering the tax rate on buildings—results in an increase in assessed land value per taxable acre, according to academic research and surveys of the system in the United States. (Journal of Housing Economics).

The system dynamically raises land values as the demand for developed land increases with more construction and economic opportunity.

A 1% increase in the adjusted tax differential (land tax rate minus building tax rate) leads to a 0.5% increase in assessed land value per taxable acre.

The increase in land value occurs because lowering the tax on buildings encourages improvements or development, raising the value of underlying land.

This system is built on the premise that the higher tax on land reflects the land's inherent value, which largely arises from its location and public investments, rather than the owner's actions. (Taxation of Vacant Urban Land, International Growth Centre, 2017).
 
Even after development, the land itself retains significant value due to its location, scarcity, and public infrastructure, and taxing this value helps recover community-generated wealth.

This means the increased value of land is largely created by factors outside the control of the landowner, such as public investments in infrastructure (roads, schools, utilities), services, and overall urban development driven by the collective efforts of the community and government.

From the perspective of economics, it’s important to clarify that this system is not a double tax on the same value but rather two distinct taxes reflecting different components of property wealth.

In a uniform property tax, taxing buildings and land at the same rate discourages improvements because additional development immediately increases tax. The two-rate system balances these incentives by making the cost of holding land high, but the cost of improving land relatively low.



This encourages expansions in the housing supply and commercial infrastructure, addressing shortages and facilitating economic scale.

Saudi Arabia needs to build approximately 115,000 new homes per year until 2030 to meet demand and achieve its Vision 2030 goal of increasing homeownership to 70%. This requirement is driven by a young and growing population.

The two-rate taxation raises the capital-to-land ratio, meaning that investments in buildings, machinery, and infrastructure increase relative to land.

More construction activity leads directly to increased employment in the construction sector and related industries (manufacturing, materials, services). This contributes positively to aggregate demand and macroeconomic output in the short to medium term.

The Saudi Arabia construction market size was valued at USD 101.4 Billion in 2025. Looking forward, the market to reach USD 138.4 Billion by 2034, exhibiting a CAGR of 3.52% from 2026-2034. (IMARC Group, 2025 report). 

 

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The scissors dynamics in the housing market 

The Kingdom’s real estate market has emerged as a cornerstone of economic activity, with total transaction value reaching SAR 267.8 billion in 2024 across 236,690 deals —representing exceptional growth of 37% y/y in volume and 27% in value – highlights a liquidity-rich market capable of digesting rapid supply increases without price dislocation.

Housing markets function like any other market where the amount consumers are willing to pay and the amount suppliers are willing to supply are balanced at a certain price.

This equilibrium price results from the continuous and simultaneous interactions of supply and demand - much like the two blades of a pair of scissors that together determine the cut (price), as famous British Alfred Marshall metaphorically suggested. (supply and demand, microeconomics 1890).

Apartment prices in Riyadh have surged by 75% since 2019, while villa prices have increased by 40% in the same period. For 2024 alone, apartment prices climbed almost 11% and villa prices by around 6%, underscoring a market where demand consistently exceeds supply.

As far as the relationship between the decrease in land prices in Riyadh and house prices, academic research shows that a change in land prices influences house prices slowly and to a smaller degree. (Town Planning Review, 2022).

This slower adjustment happens because new housing supply adjusts with a significant time lag due to development processes, planning permissions, and construction times.

So house prices do not respond quickly or proportionally to land price changes. The housing market further includes transactions of existing homes with prices determined by the interaction of supply and demand.
 

 

The real estate sector in Saudi Arabia lies at the heart of Vision 2030. The scale and continuity of the Kingdom’s real estate and infrastructure projects indicate that it has already moved from the vision phase to the execution phase.

This transition is supported by sustainable financing mechanisms that align with societal needs and global standards of governance and environmental responsibility—instilling confidence in both local and international developers and investors. Click Here to Read Complete Report