REAL ESTATE INFLATION
ARTIFICIAL SHORTAGE CAUSES ENORMITY IN PRICE
TARIQ AHMED SAEEDI (email@example.com)
Apr 21 - 27, 2008
While inflation in real estate sector is because of its being sensitive to the volatile developments in interlinked economic driving agents, speculative trading and artificial shortage in this sector jack up enormously price graph of properties bowing the purchasing power of common person of buying land or house down ruthlessly. Pakistan is already facing a significant supply-demand shortfall in housing units. The mushroom growth of population coupled with burdensome price is farther widening this gap gradually and slowly. The joint family system in our country has been fortunate enough to contain elasticity in demand of housing units, otherwise the gap would have been wider and might have created situation analogous to India, where people without shelter are common in sight.
Construction of house has turned out to be an expensive activity owing to the revaluing of allied activities associated with the construction industry that propels industrial activities of several businesses. Similarly, rent on property also keeps on increasing. While increase in price of land has different stimulus, construction industry takes major monetary affects of steel, oil, cement, and labour prices. Volatility in prices of petroleum products has translated into allocation of more outlay for logistic support used in the construction process. Transportation of materials is very essential in mega construction projects because of the difference between location of construction and location for preparing materials. The difference in distance has now differentiated cost of logistic finally adding to the cost of finished project. The financial risk accrued in the cost of project due to the spiraling inflation has extrapolated high estimated cost upon project completion again increasing in the value of price tag. In small construction, however, transportation expenditures do not account for as much as rates of raw materials. In fact, regular price rise of steel and cement hit hard such constructions and allied industries. By virtue of that, price of afresh built unit has increased; advantaged by the market dynamics, value of old construction has also received a large upward shoot.
INFLATION AND CONSTRUCTION INDUSTRY
Tariff increment of base oil-lubricants-by government does not go well with the price relief of many people begetting additional working expenditures of constructors. Although wages extend during the inflation, labourers do not gain as much as they lose amid price hike. While it is logical that uncertainty in prices may have put a halt in the construction activity, it seems that inflation has not shocked the construction industry an inch as construction projects are moving up unabatedly. Perhaps reason is underlying the fact that constructor does not hold cost addition and immediately passes it on to end customer. The misery indeed dawns on the fixed income group and impoverished segment of the society after the whopping inflation metes out. Basically, inflation gives profit to debtor and profiteer at the expense of creditor and fixed income group. That's why price hike brought sparkling capital gains in stock exchanges and shaped real estate into a lucrative sector.
Recall just-bygone anal and it would reveal that real estate had become a sagging sector so had the capital market. No new investment dared to inflow in these sectors. And, suddenly depreciation in interest rates over term deposits was introduced to discourage bank deposits transferring flow of liquidity from banking system in to the capital market. In spite of prospering capital market afterwards pulled barrier off significant investments, impulse interest rate cutoff over deposits blocked source of income of numerous households for who real estate or stock market were too technical to invest in. Concurrently, real estate sector and stock market have both been marred with the speculative trading, which is not even harmful if not crossed beyond ceiling. Sadly, limits are often gone around especially in real estate sector that requires standardized rules and regulations. Presently, there has no monitoring framework been devised to regulate real estate sector. Investment in real estate is as promising for investors as bourses for stokers. Yet, lack of regulations in real estate promotes unfair market practices and fleecing of genuine buyers and sellers.
ARTIFICIAL SHORTAGE AND INFLATION
While government determines value of per square yard, hardly any one follows the formula. Subsequently, price of land is subject to be determined at the behest of market mechanism. Large investors can churn out huge profits in real estate business because of their financial ability to engage heavy amount for a piece of land over a longer period of time. The profit margin on invested money is often sizeable. This calls only for strayed money of big investors, who are undecided about the usage of their capital. Real estate agents keenly trawl after such investors to convince them into wholesale investment in industrial plot or set of residential plots. At one time they can manage to keep hold on as less as 20 property documents igniting an artificial shortage in the market. Once the artificial shortage optimizes demand graph they kick start looting spree on properties usually bought at throwaway prices. Many property agents became overnight rich following the sudden rise in price of real estates and outnumbered are those who still extract ample payouts out of artificial shortage.
To curb core and food inflations last government had been stretching basis points in discount rates. Also, increment in CRR might have shortened the size of money in circulation that was considered as a major cause of price hike. But it is a tiresome historical pattern of brining price level down as fiscal and monetary policy adjustment could not always arrest inflation. Correction in macro economic factors might have produced desirable outcomes in few counties such as in Germany, which was stricken by the catastrophic food inflation in 1923. But, the economic context of Pakistan is unlikely to reflect on micro level metamorphism inducted in the lending-borrowing arrangement of commercial banks. Rather, government must tighten its grip around the sectors that misrepresent impact of inflation and take them under valuation to ease intensity of cumulative inflation. One of such sectors is real estate that registers phenomenal price rise nonetheless cost incurred on land or old construction remains stagnant. In addition to this, Real Estate Investment Trust instituted in the last government to develop pooled investment of public in real estates appears to be a prospective avenue for big profit seekers. That would it improve return on saving in real estate funds by small investors is skeptical.