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.
NATIONAL HOUSING POLICY
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outdated building and zoning regulations etc.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
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
STEPS TO ENCOURAGE HOUSING SECTOR
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)
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
MEASURES IN 2003-04 BUDGET
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
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
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
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
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
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
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
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
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.