HOUSING FINANCE

Augmented by the World Bank project the government should also make efforts for easy availability of housing finance on affordable cost

From SHAHMIM AHMED RIZVI,
 Islamabad

Feb 02 - 15, 2004

The World Bank has offered to assist Pakistan in its endeavor to meet escalating shortage of housing units by offering a soft loan of $125 million through its lending arm of International Bank for Reconstruction and Development (IBRD) which had stopped lending to Pakistan about 5 years back because of its precarious balance of payment position.

The bank has appreciated the emphasis the government has laid on development of housing sector in the current year (2003-2004) budget. Considering the resource constraints, the bank has offered to augment the financial resources available for the development of this sector. Overall this project intends to implement a comprehensive programme to help revitalize the primary housing finance market through increased private sector participation.

Pakistan faces a critical shortage of houses which is escalating with the passage of time. According to an estimate (which now stands confirmed by the World Bank study of the subject) Pakistan is faced with an accumulate shortage of 5.4 million houses which is rising with every passing year. The annual demand has been put at 1.5 million houses against construction of about a million units. In urban areas, the problems is more acute where hardly half of the demand is met annually. While the government has given priority to housing and construction in the current year development budget by offering various fiscal incentives, the sector is still suffering from inadequate long term funding resources; there is an unmet demand of over Rs. 70 billion against the availability of less then Rs. 5 billion. The housing sector is still plagued by a restrictive banking environment, as mortgage lending is still perceived as risky. Accordingly to the World Bank report restrictive land administration system and incomplete record keeping have also eroded the confidence in housing loans from both lenders and borrowers. Moreover, availability of housing finance has shrunk from 1.5 percent of GDP in 1994 to approximately 0.5 percent in 2001.

However, quite recently, positive macro-economic reforms have also resulted in a more enabling environment for this sector. Recent studies indicate that lack of finance is primarily a supply of finance problem. Most housing finance comes from personal resources. The next source, the informal landing sector (10 percent), is poorly regulated, particularly in consumer protection (developer's advances, for instance). The formal financial sector provides limited housing support, essentially through three major sources: the government's House Building Finance corporation, specialized housing finance companies and, marginally, some commercial banks.

A market based system of housing finance provides the real economic benefits and positively impacts savings, investment, output and employment. By increasing the number of middle income families with access to affordable housing finance, the project will help mobilize dormant or locked savings and generate new savings. In turn, each dollar invested in the housing sector will catalyze economic activity in other sectors providing a much needed economic boost to the economy, which has not yet responded to recent positive macro-economic developments. Second, by increasing the number of middle income, families able to access market resources for housing finance, the government can direct feed up resources to social housing programs targeting the poorest urban dwellers.

Even a cursory glance of the history of housing construction efforts by successive governments will point to our erratic approach. Like any other industry, housing which cater to the basic need of shelter can best proper under a market based system of which our economic planners have remained shy. Success achieved by many other countries in this regard has fully demonstrated that the market based system of housing finance has played a key role in house building on mass scale. It has not only provided shelter to the majority of the people, generated savings and economic activity besides increasing employment opportunities.

Augmented by the World Bank project, the government should also make efforts for easy availability of housing finance on affordable cost. The government should also consider the supply of developing houses after having completed by the developers. After making a down payment the buyer should be able to move into the newly bought house and pay the installment of loan instead of rent. As for the housing finance, a mortgage of about 20 years landing rate of 6 to 7 percent should prove helpful in supporting the construction of new housing units. This will not help the middle and lower middle of our population but the resultant boom in the construction industry will provide employment to the hundred of thousand of skilled and semi-skilled poor jobless people.