Affordability of low-cost housing

VIAJawaid Bokhari
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POLICYMAKERS are trying to make low-cost housing affordable for lower-middle and low income segments, and incentivised housing finance into a viable business proposition for banks.

The upward revision of property valuation for levying advance and capital gains tax in upwards of 20 major cities may bring down soaring real estate prices. This may also benefit genuine buyers.

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As a result of similar measures, plot prices in Karachi dropped by around 15 per cent and nearly stagnated in Lahore between April and September 2018. Data compiled by a leading real estate market player shows that housing prices had gone up by 139pc and prices of plots had tripled since June 21, 2011.

State Bank of Pakistan (SBP) analysts say the data indicates that ‘a significant share of the unreported gains finds its way to the country’s property market.’ And that the ‘very low property valuation’ provides individuals with a ‘legal’ way of under-documenting transactions.

The SBP report has stressed the need ‘for putting in place a non-judicial foreclosure framework in order to make it convenient for banks to exercise their right to collateral.’ There is a need for caution in this area
Property values have been revised by an average 15–25pc and, according to a leading builder, up to 110pc in phase 7 and 8 of Defence Housing Society Authority in Karachi and 15-20pc in other areas of the city. Further hike in evaluation rates is expected next year to raise rates to 80pc of the market value from 60pc stipulated in the current revision.

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Dwelling on ‘Real Estate—Implementing the Announced Reforms,’ the State Bank’s first quarterly report for the current fiscal year observes: The real estate sector — housing, construction, retailing, hoteling and renting of spaces for official or trading purposes — has gradually evolved into an important source of income growth.

Over the past decade, the combined share of housing and construction in the country’s GDP has been consistently higher than 9pc. The sector’s gross overall fixed investment activity has even surpassed the same in the manufacturing sector which is normally supposed to play a more vital role in the country’s economic development.

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On the other hand, the report says a booming real estate market and soaring prices have made housing unaffordable for most genuine buyers. Nearly all the urban housing shortage lies in the lower-income segment of the society.

General housing finance is moving at a snail’s pace. In the first quarter FY2018-19, outstanding housing finance increased merely to Rs89.79 billion from Rs89.18bn over the same period last year.

To address the issue, the government has announced tax incentives for financing of low-cost housing (LCH).The second mini-budget has proposed a cut in taxes from 35pc to 20pc on bank loans extended for LCH.

Similarly, the State Bank had earlier announced a subsidised financing facility under which banks will be provided Rs1 million or 50pc of the loan amount at an interest rate of 1pc while the end borrowers will be charged at 5pc.

These efforts will be supplemented by the Pakistan Mortgage Refinancing Company supported by a World Bank loan of $58m. The company’s lending rate to banks will be 2percentage points less than for 3-year Pakistan Investment Bond for low cost housing, and 50 basis points lower for general housing.

The task force on housing is also looking at proposals on how to make housing affordable for genuine buyers. It may recommend that the government ‘offer small plots, houses and apartments at cheaper rates,’ says Mr Mohammad Hassan Bakhshi, chairman of association of builders developers and a member of the task force on LCH.

He says that the Task Force will finalise its recommendations in 3-4 months. Meanwhile the mini-budget has proposed setting of up Rs5bn revolving fund for investment in the segment.

But in bankers’ view, housing finance also suffers from other lingering limitations such as issues related to non-availability of a common record of land and entitlement and strident regulations for site developments. Bank managements, shy of taking risks, also remain reluctant to expand their mortgage portfolio due to ‘weak contract enforcement and uncertainty of title deeds.’

The SBP report has stressed the need ‘for putting in place a non-judicial foreclosure framework in order to make it convenient for banks to exercise their right to collateral.’

There is a need for caution in this area. Going by the experience of subprime loans in the United States and complaints in the recent past of the treatment meted out to borrowers in the consumer lending segment in Pakistan, the move may discourage rather than promote low cost housing.

To prevent arbitrary decisions by banks, there should be a third party intervention. Perhaps, the Banking Ombudsmen could have a special department that deals with foreclosure laws. Much of the banks’ risks has already been taken care of by tax incentives and subsidised refinancing of loans for low-cost housing.

The challenges become more complicated owing to a strong need for bringing real estate into the formal sector and at the same time enlisting support of the builders and developers to help the PTI- led government’s agenda for 5m housing units.

And to quote real estate analysts: “If industry dynamics are to be improved, the urgency to address property market issues needs to be felt across the entire chain of stakeholders. This includes the property market, federal and provincial governments, real estate developers, builders, banking industry and suppliers of construction materials.’

Published in Dawn, The Business and Finance Weekly, February 11th, 2019

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