June 28 - July 04, 2004





According to a recent Population and Housing Census of Pakistan there were over 19.3 million housing units in the country. Of the total 19.3 million housing units in 1998 i.e. 67.7 percent were in rural areas and 32.3 percent in urban areas. Nearly 15.6 million or 80.8 percent were owned, 1.7 million or 9.0% were rented and 2.0 million or 10.2 percent were rent free. The percentages of owned housing units were higher in the rural areas compared to the urban areas. However, the percentage of rented houses was significantly higher at 23.2 percent in urban as compared to only 2.3 percent in the rural areas.

The World Bank's has recommended occupancy rate of 6 persons per house, as such the total number of the required housing units in the country was projected roughly at 24.8 million as at the end of June 2003 based on the population of 149 million at present. And according to National Housing Policy 2001, the country needs an additional supply of 570,000 units per annum while the actual supply is around 300,000 units. Thus there is a net shortfall of 270,000 units per annum and the backlog is increasing every year.


The rate of construction of new dwellings needed to meet the growing demand has been falling far short of requirement. Therefore the government appreciating the gravity of the situation and realizing the linkage of this important sector with the housing industry and its potential to generate employment decided to revitalize it as a vehicle for economic revival. Accordingly, the Ministry of Housing and Works formulated a new National Housing Policy-2001, which takes into considerations the manifold problems including housing shortage, lack of housing finance, non-existence of foreclosure laws, lack of planning, outdated building and zoning regulations etc. the major emphasis of the policy is on resource mobilization, land availability, incentives for house ownership, incentives of developers and constructor and promotion of research and development activities to affordability, especially for the middle and low income groups. One of the cornerstones of the policy is to ensure construction of housing for the poor and the needy and housing for the majority of rural population through the use of different instruments such as free land, cross-subsidy and concessionary finance and the like.

Fortunately the general conditions in the country are quite conducive to achieving a rapid growth in the housing industry. Under a stable macroeconomic environment a foundation has laid for sustained high growth in the medium-term. However one major area that had lagged behind is the housing finance, a critical input required for the promotion of housing industry. It would be relevant to note here that in the developed countries, on an average, housing finance (outstanding stock) represents over 25% of GDP (USA 53%, European Union 36%). In the developing countries the corresponding numbers are 21 percent for Malaysia, 16 percent for Thailand, 12 percent for Chile, 7 percent for Morocco, 5.5 percent for Tunisia, 4.5 percent for Brazil and Mexico, 3 percent for Sri Lanka, and Iran and 2.2 percent for Bangladesh.

In contrast the number is hardly 1% of GDP in Pakistan. This low number does not represent any lack of demand rather it reflects the absence of a properly organized approach to housing finance, which has hitherto suffered from rather high interest rates. No doubt government has brought down interest rate to 8% but still this rate is quite high, it should be around 3 to 4% in order to promote housing sector in true sense.

There are some other significant constraints in the housing sector that either increase the cost of transaction or increase risks for the lender to unmanageable levels. These can be identified as poor record/retrieval of property rights, high stamp duties, bureaucratic delays, corruption, disorganized state of the real estate market etc.


To facilitate this sector the government has taken a number of steps which include:

The legal framework for the loan recovery of financial institutions has been further streamlined and strengthened through the promulgation of Finance Institutions (Recovery of Finance) Ordinance 2001.

Through a more effective macroeconomic management the government has succeeded in reducing the general interest rates in the country. This will provide an opportunity for banks and other financial institutions to provide more affordable mortgage loans.

The Housing Building Finance Corporation (HBFC) the country's largest specialized housing finance provider has been put under a new and professional Board of Directors and management with a mandate to restructure the institution into a commercially viable and self-sustaining entity. Eventually the HBFC will have to compete in the market for business and resources at par with private sector institutions.




The government has taken numerous measures in the current year's budget to boost housing industry. These include:

Tax rebate on mark-up to Rs. 500,000 or 40 percent of the income, whichever is less, has been given to those individuals who construct their houses through loans from banks and non-bank financial institutions.

Withholding tax on property income was 7.5 percent on an annual rental ceiling of Rs.100,000. The rate has been reduced to 5 percent and the ceiling has been raised to Rs. 200,000.

Debt equity ratio in housing financial has been improved to 80:20 from 70:30.
The per party limit has been raised to Rs. 7.5 million from Rs. 5 million.
The maximum loan period has been enhanced from 15 years to 20 years.
The maximum limit of lending for HBFC has been raised to Rs. 5 million.

Provincial governments are rationalizing stamp duties and registration fee on transfer and acquisition of housing property.

All these measures will provide a significant boost to housing and construction sector. With a backlog of 270,000 housing units in the country the demand for housing finance is enormous. If the average cost of a housing unit is taken at Rs. five lacs (a very conservative estimate); and 50 percent self financing ratio, the total demand for housing finance is close to Rs. 68 million against the current supply of close to Rs. 3-4 billion. Thus there is a great scope for a quantum jump in the housing finance business.


The entire infrastructure of housing finance has remained highly underdeveloped although some steps were taken half-heartedly since 1990. The following measures need to be taken urgently:

The Ministry of Finance should announce that housing industry is a high priority sector in the market based economy.

There is urgent need to establish an apex housing bank as in India, Thailand, Indonesia, to license and regulate housing finance sector, provide liquidity to HFCs as lender of last resort; standardize documents, provide information on credit worthiness of both borrowers and lenders administer saving and loan accounts of HFCs.

Payment of withholding tax and Zakat on residential house should be exempted.

Entire mark-up payable on housing loans and installments up to Rs. 500,000 should be treated as deductible expense by income tax authorities.

To encourage deposits for housing, deposits kept for three years or more should be exempted from income tax like Pension Fund.

In view of requirements of investment capital for long period, HFCs may be allowed to create a special reserve of an amount equal to their paid-up capital, which should be exempted from payment of income tax.

Investment of insurance/pension and provident funds should be allowed on TFCs and COIs of HFCs as they also represent long-term investment like housing loans.

Foreclosure laws are still cumbersome, complicated, time consuming and expensive as jurisdiction of courts still remains when defaulters has to vacate the property or criminal proceedings are initiated on account of default of bad cheques.

Stamp duty on registration of property purchased with a housing loan of a registered finance company should not exceed one percent of the value of property (This shall be basically for record and registration purposes).

The government and local bodies, should enact laws on the lines of Malaysia to protect the interest of local allottees in matters of delays, use of construction materials workmanship and investment by financing in situation and clients.

Rent control laws need immediate revision to protect home owners.

Title of documents of property should be simplified, computerized made available on demand.

At present five areas in Karachi have been in negative list of Commercial Banks, there should be no negative area for house financing.

Establishment of specialized banks for granting loans to builders and developers on syndication basis. At present almost all the commercial banks are providing loans to individuals for the purchase of the construction of housing units. But it is felt that these banks are not gear up to cater the needs of bulk financing/project financing to the housing industry because this segment of financing is not core business of commercial banks. Therefore, it is much needed to form a specialized housing bank, which will provide finance to builders and developers on syndication basis.

The steps indicated above are necessary to make the housing industry vibrant and strong and to develop an environment capable of meeting needs of the people. In order to further vitalize the system it appears imperative that actions proposed above are monitored with a clear-cut strategy and following action taken.

Housing and construction has the potential of absorbing large number of skilled and skilled workforce and therefore the revival of this sector will also help reduce poverty in the country.

Housing and construction sector is not only highly labour-intensive, it has also multiplier effects on industrial activity in the country. Revival of this sector will also generate momentum in almost 72 allied industries such as cement, iron and steel, aluminum, PVC, paints and varnish, sanitary, carpets, stone crushing etc. Thus the housing and construction sector can safely be regarded as the mother of industrial activity in the country.

Broadly speaking a rapid growth in housing finance business will accrue significant benefits to the economy in the form of employment opportunities, support to a variety of sectors, a higher economic growth, and fulfillment of an important social need. It would be beneficial to the financial sector as well. If organized along scientific lines mortgage lending is least expensive and relatively low risk particularly for owner occupied homes. It would add diversity and dimension to the problems of portfolios of banks that need to find new avenues and pockets in the wake of general decline in the quantum and yield on government papers and growing competition in the financial sector.

Before concluding this review some points of caution would be in place. In order to have a sustainable housing finance system in the country it is essential that it will be market based. In other words the market should not be constrained in terms of who can lend for housing and who can borrow from whom the market is the best place to decide these matters. Therefore it follows that housing finance market should be broad-based rather than concentrated in a few pre-selected specialized institution. This approach has been followed by almost all the countries who have achieved a good measure of success in developing housing finance system. Moreover the demand for housing finance in Pakistan is too large to be met by a few institutions. There can be an efficient market only when there is an open competition without any artificial constraints on any market agents. Another caution point is that there is need to improve significantly the enabling environment, i.e. the property market, the property registration and retrieval system, legal and judicial system and the real estate market. And since reforming these areas cut across various federal, provincial and local jurisdictions there will be need to get cooperation from all the shareholders. It is indeed encouraging to note that the Ministry of Finance and the State Bank of Pakistan have assured their willingness to take a lead role in coordinating efforts to resolve the relevant issues.