A shortage of housing and rising land costs are causing house prices in Saudi Arabia's two largest cities to rise while an increase in new office space will push rental rates lower in Riyadh, a report said on Sunday.

"The sheer pressure of population growth, increases in construction costs and the shortfall in development are likely to force house prices slightly higher in Riyadh in the short term," CB Richard Ellis said in a report.

House prices in Saudi Arabia's second largest city, Jeddah, have also risen in the past 12 months as the city of 3.5 million faces a shortage of around 300,000 homes, the report said.   

While most of the demand for housing in the kingdom comes from low income individuals, the absence of a mortgage law and lack of financing is preventing developers from building for that segment of the population.

With a growing population of over 25 million, 70 percent of which are under the age of 30, the world's largest oil exporter will need to build one million new homes by 2014, HSBC said last year.         

"Developers cannot build the low-cost or 'affordable' housing desperately needed by large sections of the population when they know that this section of the population cannot afford the finished products," CB Richard Ellis said on Sunday.

Saudi Arabia's long-awaited mortgage law has been in the planning stages for almost a decade. Around 400,000 sq m of new office space in Riyadh is expected to enter the market by the end of 2010, the report said.  -Reuters