Land prices in Jeddah jumped as much as 30 per cent in the past year, pushing home prices up to record levels.
A typical villa in Jeddah costs 3,980 Saudi riyals (Dh3,898) a square metre, a 15 per cent increase from a year ago, according to a report by the property consultancy Colliers International. Apartment prices have risen 14 per cent.
In many projects, land accounts for 50 to 60 per cent of overall development costs, Colliers said.
"With pressure on land and land prices, it's very difficult to build affordable housing to appeal to the majority of the population," said Ian Albert, the regional director at Colliers.
Because land prices are so high, many of the new projects are catering to high-end buyers. Apartments in towers under construction along the waterfront are priced at between 12,000 riyals and 22,000 riyals a sq metre. Many of those projects are finding it difficult to attract buyers - the majority of the population cannot afford them.
A recent study by the consultancy Jones Lang LaSalle found 58 per cent of Saudi households had an average monthly income below 5,000 riyals.
"It is still a price-sensitive market," Mr Albert said.
Jeddah is a microcosm of the forces affecting all of Saudi Arabia's property industry. Land is a commodity, with speculators helping to drive up prices, he said.
Despite the size of the country, there is a shortage of developable land.
"Although there is a lot of land, a lot is not accessible by infrastructure," Mr Albert said. "The more infrastructure built, the more land will become available."
Large portions of developable land are taken up by master-planned developments, which are struggling to attract financing, he said. And international developers still find barriers to working in the kingdom.
"Saudi Arabia has eased the entry requirements significantly," Mr Albert said. "However it is still difficult to attract the right staff."
In Riyadh, small and mid-size developers account for 85 per cent of projects. Villa prices in Riyadh, the Saudi capital, are up 9 per cent in the past year to 3,150 riyals a sq metre. Apartment prices are up 8 per cent to 2,860 riyals a sq metre.
The shortage of supply, as well as the price of land, continues to drive up prices, according to Colliers.
"Market demand is being driven primarily by a rapidly growing, young population seeking solutions for their residential requirements," Colliers reported.
In the Eastern Province, new buildings are now taller, typically between eight and 12 floors, in large part because of the "decreasing stock of developable land" in Dammam and Al Khobar.
"Apartments [in the Eastern Province] are increasing in popularity, in comparison to villas, primarily due to their affordability," Colliers reports.
Villa prices increased 14 per cent in the Dammam and Khobar areas to 3,510 riyals a sq metre in the past year, while apartment prices jumped 10 per cent to 2,841 riyals a sq metre.
New developments in the region - including Al Khobar Lakes, a 2,100-home project developed by a subsidiary of the Dubai developer Emaar - are primarily targeting high-income households, bypassing the pent-up demand for affordable housing.
"This is a typical trend observed throughout the kingdom," Colliers reports.