A ROADBLOCK TO HOUSING FINANCE
PROHIBITIVELY HIGH INTEREST RATE IS PROMOTING CASH TRANSACTIONS IN UNSYSTEMATIC, UNREGULATED, AND UNSUPERVISED HOUSING AND CONSTRUCTION SECTOR.
TARIQ AHMED SAEEDI
Feb 28 - Mar 6, 2011
Despite well cognisant of the fact that the share of financial sector in housing and constriction sector of the country is one to two per cent of the total housing transactions, State Bank of Pakistan is not ready to root out its main cause i.e. high interest rate, which generally discourages property developers to seek finances from commercial banks to build housing projects. The prohibitively high interest rate of 14 per cent translating in to 18 to 20 per cent for housing/mortgage borrowers is clearly promoting cash transactions in real estate or housing and construction sector that is awfully unsupervised, unregulated, and unsystematic on one hand and impeding the growth of housing projects for low- and middle-income groups on the other.
Until September 2010, outstanding housing loan was recoded at Rs68.6 billion, according to the latest July-Sep, 2010 review by Infrastructure and Housing Finance Department of State Bank of Pakistan.
House Building Finance Corporation has the largest customer base in low- and middle-income groups as compared to 29 commercial banks and one development finance institution involved in housing finance. They all were catering to a little over 0.1 million borrowers, suggested the review. When it comes to housing microfinance, total number of borrowers of microfinance banks was 1,960 and lent amount Rs140.25 million as on September.
Informal financial sector meets the 10 to 12 per cent of the housing transactions taking place in the country. Increasing rate of non-performing loans is one of the factors inducing reluctance in commercial banks to increase assets in housing sector. Housing NPLs were recorded at Rs18.10 billion in September 2010, depicting an increase of 18.67 per cent compared to Rs15.26 billion in the similar month last year, as per the review. "Rise in NPLs is primarily due to inflation and high interest rates," conceded the SBP.
Housing sector can prove a powerful elixir for Pakistan's domestic economy. The ripple effect construction industry creates in the job market happens to be impressive. A minister in the last cabinet said construction of 100,000 housing units could generate 500,000 jobs while its push to 70 allied industries could result in creation of another 700,000 jobs. Apart from calculations, construction industry can rotate wheels of more than 70 industries right away. Therefore, its upsurge may result in to economic growth to the least.
Unfortunately, construction industry has a share of 3 to four per cent in Pakistan's gross domestic products in contrast to 5 to seven per cent in India, which faces similar problems facing by Pakistan's housing and construction industry, though Indian housing sector has grown to a relatively better position because of strict regulations and good housing finance to GDP ratio.
The government is responsible to contain the cartelisation to bring down prices of essential inputs in the housing and construction sector. For example, during ten-days of last month, price of cement jumped to Rs342 from Rs310 per bag in Sindh while in Punjab average price was Rs355 per bag. Punjab produces 45 per cent of total cement in the country. The price of cement is rising artificially at the behest of a cartel in the province, said Babar Mirza Chugtai chairman association of builders and developers (ABAD). Without its manipulation, there is no possibility of price hike, he added. There is cement shortfall in the country due to underproduction in Punjab and excessive exports of cement from Sindh. It is beyond logic to prefer export in the wake of domestic shortage, which is impinging on housing and construction sector badly, said ABAD chairman. He called for a strict action by competition commission of Pakistan (CCP) against cement cartels, citing heavy penalties imposed by CCP in past, which augured well to pare down unfair prices of cement bag.
The need of housing increases manifold as the floods/rains increased the shortage of housing by nearly two million units and expedient reconstruction can alone provide shelters to the homeless people affected by floods of last year. Rains/floods affected 20 million people nationwide, according to the text updated on the World Bank's website on Jan 12, 2011. The damage to the housing sector in value terms is estimated at staggering US$1.588 billion, according to the Preliminary Damage Need Assessment report compiled by the World Bank. Overall more than 1.6 million housing units were demolished partially or completely; 913,307 houses were razed to the ground or washed down and 694,878 units partially affected, the report noted while giving a threadbare breakup. Majority of them were obviously Katcha houses made up of mud and canopies. Out of the total destructed houses, 847,455 were Katcha housing units. Notably, 55 per cent of total stocks damaged completely/partially, nationwide were in Sindh. The report noted there were 12.34 million housing units in flood-affected seven regions of the country; 5.32 million pucca and 7.02 million Katcha. Katcha housing units were in majority in Balochistan (87 per cent of 573,178 housing units in the province) and Sindh (72 per cent of 3.61 million units in the province), suggested the table in the report. Province-wise, 24 per cent of total housing units were affected in Sindh, followed by Balochistan (14 per cent), Punjab (eight per cent) and KP (nine (per cent).
While the report advised compensation to the verified victims from the fund released by the international donor agencies and countries, it emphasised the need of owner-driven rebuilding.
State bank of Pakistan can spur the growth of housing and construction industry by bringing down rate of interest. The central bank is collaboration with World Bank is planning to set up mortgage refinance company and ensure availability of low cost housing finance. It should be set up as early as possible to expand outreach of housing finance.
Government's regulatory framework should be immaculate enough to remove the loopholes caused by land mafia, unregulated realtors, and cartelization of any kind that triggers input prices. There is a dire need to rectify the land administrative procedures to attract property developers towards starting housing projects for masses and formal financial institutions to participate in such developments. Computerization of land records is advised as a best solution to improve land administrative procedures in addition to reinvigorate legal system. Housing for low- and middle-income groups can be a rampart against the uncontrolled urbanisation and its impact on economic and social life of masses. Infrastructure and housing development in rural areas can become a positive force to reduce poverty both by creation of job opportunities and lightening concentration of population in urban centres. It is obvious when the government intervenes in property and real estate businesses through balanced policies, unfair practices would automatically come to an end and confidence of commercial banks in mortgage/housing finance be restored.