Oct 18 - 24, 2010

Houses for low-income group in Pakistan are very limited and out of total housing shortage of 7.57 million in 2009, six million were to serve lower-middle-income and low-income population groups, according to a latest market review of South Asia by the World Bank.

"Pakistan is facing unprecedented challenges of acute housing shortages, unhealthy living conditions, and nonexistent or dilapidated infrastructure across the country," it says.

Outlining the main causes of slow large-scale construction market development especially low-income housing, a latest market review and forward agenda by the World Bank with the title of 'Expanding Housing Finance to the underserved in South Asia' says reluctance of financers towards funding low-income housing projects widens the housing demand and supply gap in Pakistan. Funding for builders is limited or available at peculiarly high interest rate, which reduces the viability of developing large-scale projects, according to the review.

Having found similarity in markets of Pakistan and Sri Lanka, the report notes that lack of transparency about the actual ownerships of lands proposed for development or mortgaged as lien for construction financing puts collateral credibility in doubts and makes financial transactions complicated. In contrast to housing finance-to-GDP ratio of 50 to 70 per cent in developed countries, this ratio is alarmingly miniscule one per cent in Pakistan, even far below than neighbouring India that has housing finance seven per cent to its GDP.

Like in Pakistan, in most of the South Asian countries developers use equity to fund projects. Funding from commercial banks and capital markets is however on rise in India, but it is still limited to high-end constructions.

Preference of builders on high-end developments is also because of fast and profitable return on investments since upper-echelon housing stock catering small-scale is like hot cake for sale in the real estate market.

Improper land administration, speculative rise in prices of lands, and bad experiences of development financiers, according to the report, are what discourage mortgage lenders to embark on large-scale housing development projects for low- and middle-income groups.


Pakistan is one those countries in the world where prices of real estate and residential houses move seemingly without strong bases and instead on speculations. Prices are unaffordable to a large segment of the society that has lowest per capita income. This very reason however made few in big cities around the country overnight rich during unprecedented real estate boom five-year back when stock exchange underwent a big correction in mid of March and investor's appetite for properties intensified. Free of regulations or check, prices of real estate in Pakistan must have increased umpteen times compared to price graph a decade ago. But, since there is no proper mechanism of recording changes in prices, broad calculation is rather based on guesstimate. Indian is the only country in South Asia with housing price index, Residex, to monitor movement of prices in real estate. The housing price index can provide needful inputs for policymaking and to develop secondary housing markets, the report says. Pakistan is in desperate need of housing policy as much as it needs generation of funds from secondary markets to meet housing demand-supply gap.

Besides housing finance societies, commercial, cooperative, and regional-rural banks are major players in housing finance market in India. Participation of commercial banks in housing finance in Pakistan has also been increasing. The share of commercial banks in overall housing finance grew to 70 per cent in 2009 from 10 per cent in 2003 with 25 commercial banks engaged in mortgage finance, says the report citing calculations from a research by Zaigham Rizivi, former chairman house building finance corporation (HBFC) and currently a housing finance specialist with the World Bank. HBFC still handles 77 per cent of mortgage clients.

High interest rate is also one of the biggest de-motivators for the prospective persons seeking housing finance in Pakistan, which sees exorbitant mark-up on loans is being charged by commercial banks. The central bank's discount rate that is factored in the lending rate by financial institutions stands alongside the highest benchmark rates in the world. The central bank revised 0.5 basis points upward policy rate to 13.5 per cent in its recent monetary policy. Making cost of funding for the debtors exceptionally implausible, this high discount rate gives solid ground of high mark-up over lending products particularly consumer and mortgage financing, which is extremely unaffordable with 20 to 30 per cent interest rate.

Despite in desperate need of housing loan, commoner tries to keep him from the long lasting hassle of indebtedness for many understandable reasons attached to the mysterious financial transactions in the country. Avoiding personal or consumer loans is also attributed to social belief against interest-based lending. Islamic banking has an enormous space to grow in Pakistan and Islamic banks have depicted 21.5 per cent growth, which is highest in the financial sector. Although Islamic housing finance rose 43 per cent from January 2008 to March 2009, "Islamic banks have not played any role in lower- and middle-income home financing", the report points out. "This mode of financing can play an important role because it often targets customers with lower-than-average-incomes."

Unpleasant experiences also drag potential debtors distance from financial assistances. Intentional concealment of information at the time of customer-bank agreement is a vey common complaint in Pakistan. Particularly, housing loan has the low penetration in the emerging financial market in the country that still has a large unexplored bankable population, chiefly due to its complicated financial transactions.

Improvement in regulatory framework, development of infrastructure for residential developments, rationalisation of property taxes, and promotion of micro borrowings would reduce acute housing shortages in Pakistan, concludes the review.