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Reforms and development of mortgage market key for real estate sector

While the property market might have seen downtimes since the last 2 to 3 years due to the unstable political and economic conditions of the country, this time real estate sector is expected to see a rise in investments in 2020. Pakistan’s real estate market has evolved into a vital source of economic growth in the country. The combined direct contribution of construction and housing sectors to the country’s GDP has been consistently higher than 9 percent over the past decade. The real estate sector not only generates high level of direct employment, it also stimulates demand in more than 250 ancillary sectors, such as cement, steel, brick, paint and other building materials.

Pakistan has a large informal economy, estimated at around 70 to 91 percent of GDP, according to the State Bank of Pakistan (SBP). The country’s property market accounts for a huge portion of the unreported gains, mainly due to low regulatory oversight, coupled with very low official property valuations. These characteristics of the property market make it easy for individuals to conceal their wealth and sources of income, as well as minimize their tax liabilities.

Several reforms have been introduced in recent years to regulate the real estate market. Most of these measures aim to increase transparency and government tax revenues, as well as prevent speculative buying in the real estate market. In 2009, for instance, filing of tax returns became compulsory for individuals owning an immovable property with land area greater than 500 square yards and/or flat with covered area of at least 2,000 square feet. Then in 2012, a Capital Gains Tax (CGT) on the sale of immovable property with holding period of less than two years was introduced.

 

The new government has acted to increase regulation. In 2018, the Finance Act of 2018 introduced vital measures to counter under-documentation and to minimize the use of the property market to avoid tax obligations. More specifically, non-filers were barred from purchasing real property with value above PKR 5 million. Traditionally, the real estate sector has been used for parking of black money. To curtail this activity and to regulate the sector, the government has initiated various policy options to control the further flow of illicit money in to the property market.

Pakistan’s housing deficit is estimated at around 10 million units, which means that more than a third of the 32 million households in the country are not provided with adequate housing, according to the SBP. Worse, the housing backlog is increasing by 200,000 units every year, based on estimates. There are multiple reasons for Pakistan’s housing woes. These include: non-availability of a common record of land and entitlement; stringent regulations for site development; limited financing has priced out lower-to-middle income segments; and reluctance of banks to expand their mortgage portfolio due to weak contract enforcement and uncertainty of title deeds. According to the SBP, the affordable house price to income ratio in Pakistan is 20:1, far worse than the global average of 5:1. As a result, more than half of the country’s urban population lives in slums.

Despite rapid growth in recent years, Pakistan’s mortgage market remains very small. In 2018, its size was equivalent to just about 0.3 percent of GDP due to high interest rates and limited mortgage offerings. Currently, mortgage rates range from 15 to 18 percent — the lowest level in a decade but still very high when compared to international standards. Home mortgages, the principle on which the global real estate industry operates, is a non-existent concept in Pakistan; home financing offered by commercial banks is largely limited to high-net income earners, and the House Building Finance Corporation hardly gives out loans anymore.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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