COSTLY HOUSING FINANCE CAUSING ACUTE SHORTAGE OF HOUSING UNITS

SHABBIR H. KAZMI
Mar 30 - Apr 05, 2009

It goes without saying that availability of housing finance at low rates is the catalyst for construction industry. However, the persistent rise in the cost of construction and shrinking availability of housing finance do not allow addition of required housing units. The result is skyrocketing rent and proliferation of katchi abadis (slums), often devoid of basic amenities.

The age-old saying is that most secured investment is investment in real estate. It is the source of regular income as well as offers opportunities for making capital gains. As such investors in real estate in Pakistan can be divided into two distinct groups, one that buys house for self occupancy and other making investment. However, both the decisions are linked with interest rate and availability of funds.

Since the cost of a house in many times the monthly/annual income of an individual, availability of credit and interest rate play the decisive role. As the repayment period ranges from 10 to 25 years and financial institutions mostly charged compound interest, the borrower have to be very cautious. The rule of thumb is that the monthly installment has to be at least twice the monthly rent. However, the biggest problem is availability of financing opportunities. The existing entities offering housing finance are incapable of meeting the demand, despite charging very high interest rate.

Real estate often competes with other investment opportunities i.e. foreign currencies, precious metals, equities and bank deposits. The US Dollar has remained a preferred global option and Pakistan cannot be an exception. In Pakistan greenback is preferred because banks are willing to extend up to 80% of the amount in local currency, also offer attractive return on dollar deposits and probability of gains are always high due to persistent devaluation of Pak Rupee. During 2008 Rupee eroded by more than 25% alone. Does any other option, which is also 100% risk-free, offer such an opportunity?

In Pakistan there are investors who invest in equities as well as real estate, mainly because of tax free capital gains. Lately, most of them were carried away by mind boggling price hike in properties in Dubai and also transferred their funds. However, they got trapped when Pakistan stock market dwindled and the US sub prime loan also started casting shadow on the Middle East property market. The problem was further aggravated as petro-dollar income took a nosedive, crude oil price falling from US$147 to US$47 in a very brief period. Even the cut in daily oil production could not lend support.

As the US economy faced bleak prospects and oil prices experienced freefall investors started focusing precious metals, best being gold. The shift was also evident in Pakistan. However, bullion market has attraction for a niche group of investors but real estate remains ever attractive for speculators as well as investors.

According to some builders, "Dubai property boom has caused the biggest dent because not only capital moved from Pakistan to Dubai but bubble burst much earlier than anticipated. Investors are bringing back their money but not without burning their fingers."

According to construction sector experts, "Diverting funds to Dubai was a big mistake because there is no comparison in market size; it is too small a market. Even Karachi market is many times the size of Middle East Market because of its population now touching 20 million. Most of the people are also unaware that the per capita income of Karachi exceeds US$20,000. It is a market where there are buyers for condominiums as well as shabby units located in katchi abadis."

According to a property agent, "Money is not an issue in Karachi. People have tons of money, which they often invest recklessly, most of the time falling in the trap of non-professional property advisors. Some of the agents pretend to be the owner of property, which often cause serious problems. Another serious issue is lack of clean title."

Property prices in Karachi have skyrocketed mainly because of demand surpassing supply. For ages government has hardly allotted plots for individual housing units of flat sites. Over the years the trend has shifted from living independent housing units to apartment complex. As most of the new complexes are being built by demolishing existing structures there has bee a substantial increase in cost. However, absence of clean title put buyer/seller at odds. It is also one of the reasons that financial institutions also do not extend loans. Therefore, the first priority of the government and the builders should to ensure clean title.

Construction business cannot be streamlined without creating housing companies capable of extending loans at nominal interest rate. In Pakistan efforts have been made in the past to involve banks in housing finance but the experience has been frustrating. As such commercial banks do not have the funds as well as the expertise to undertake housing finance activities.

As stated above money may not be a problem for the buyers of condominiums but is certainly a serious issue for the buyers of low and medium cost housing units. If the central bank can make lending to agriculture sector mandatory for the commercial banks why it can't ask them to create a pool of fund from which housing finance companies can drawdown funds?

Making construction industry vibrant has snowball effect on economy because it provides impetus to around 40 different industries besides providing employment to thousands of people. The history shows that the rulers of subcontinent used to spend more on construction of buildings, parks and infrastructure during recession. However, the opposite is observed because the present rulers do not hesitate in cutting down development expenditure but always willing to indulge in extravaganzas.