Every promise that this government has made has been overly ambitious. Even a little venerable in its sheer ambition, though the outlook on bringing these ambitions to fruition remains grim. The proof is in the pudding and the eating of that pudding to see if it is cooked all the way through. If that metaphor is too much, consider the grandiose 5 million housing program Khan announced when he was elected Prime Minister against the mammoth growing housing shortage of 10 million houses. Ambitious, yes. Proof, undercooked.
Some land has been acquired, some cities earmarked, some projects allocated, some applications collected, but the fundamental areas that needed work to promote a housing market are absent. While discussing all of them is beyond the scope of this column, let’s look at mortgage.
Now it must be mentioned here that there is very little information about how the Naya Pakistan Housing Program (NPHP) actually works. Mortgage financing and/or developer financing is not a headache that the NPHP has taken on itself, which is extremely unusual since no housing market in the world, even social housing market, can be developed without a robust financial system backing it up. In fact, home ownership and affordability cannot be achieved without long term financing options available to buyers. Couple that with the fact that nearly 70 percent of the existing shortage in Pakistan is in the low-income housing.
Back in July-18, the SBP came out with a comprehensive policy to promote low income housing finance in the country. It didn’t create the hype that it should have, but it was one of the better policies that the country has seen. The SBP identified the many demand and supply side issues hindering housing finance to take off (weak contract enforcement, uncertainty of titles, maturity mismatch, unaffordable, and so on.). Keeping them in mind, the central bank proposed subsidised financing facilities for home buyers as well as builders. Though the tenor for the loans was 12.5 years, which is much lower than global mortgage tenors of 20-25 years, 50 percent of the loan was to be given at 5 percent (with banks’ premium of 4 percent) by SBP and the rest of the loan would come from financial institutions at a fixed rate of 12 percent. The average rate became 8.5 percent for the entirety of the loan. Moreover, the policy proposed that government land earmarked for low income housing could be given to developers free-of-cost for 50 percent houses and apartments in the low income category.
Here the policy identified low income as a house price of less than Rs2.5 million, loan size up to Rs2 million and monthly income of a borrower up to Rs60,000. Through an open bidding process, the project would have been given to the developer offering a maximum number of low-income flats. This model is inspired from global practices with same or similar modalities in providing low-income housing as well as slum conversion housing to some phenomenal successes.
Had this policy been implemented, it would have instantly raised the housing finance market, even though the aforementioned financing facility is not the most affordable for the lowest income groups. As the graph shows, if affordability is defined as a monthly mortgage payment of no more than 30 percent of the household income, and given the SBP policy, the proposal would still push out anyone earning less than Rs40,000 per month buying a housing costing Rs1 million. The monthly installment for this property would be around Rs10,000. Moreover, it would not be possible for a household to purchase Rs1.5 million-property if the household income is less than Rs50,000. The monthly installment for this property would be around Rs15,000; and so on.
As Hassan Bakhsi told BR Research in a recent interview, to get a flat in Karachi in the outskirts for less than Rs4 million is nearly impossible. Even supposing some builders came up with projects where the flat prices were in the Rs1-3 million range, it would be really pushing the envelope. Though as per these calculations, a household income of Rs60,000 could avail this subsidy easily and afford a house of up to Rs2 million (monthly installment around Rs19,000).
Since then, the SBP has retracted the July-18 policy and came out with a much condensed one in Mar-19 scrapping all the financing facilities under its predecessor. The new policy redefines low income housing as a unit costing Rs3 million for a loan size up to Rs2.7 million and no income level identifier. The last one is probably for the best. The policy is now only subsidising special segments: widows, children of martyrs, special persons, transgenders and persons in areas severely affected by terrorism. The entire loan is to be given at 5 percent and there is nothing for the general population.
The Pakistan Mortgage Refinance Company (PMRC) on the other hand has been given $140 million by the World Bank for low-income housing. The PMRC has signed agreements Rs4.8 billion with House Building Finance Company (HBFC), Askari Commercial Bank, First Women Bank, Bank Islami and Khushali Microfinance Bank. If all houses cost Rs1 million, and the loan to value is 90 percent, this refinancing would cover about 5,500 loans. The product is at fixed rate mortgage of 12 percent and a tenor of 20 years. This product also is unaffordable for folks earning under Rs35,000. But at the end of the day, it’s a rolling loan.
Two points must be mentioned: One- that the 5 million house construction at this point is too ambitious to materialise. The scrapped SBP policy is a disappointment, but the PMRC facility is a start. As loans are disbursed and payments are made, more loans can be given. The low-income segment (earning under Rs50,000) however, will remain outside the ambit of the program.
Second- there is still the problem of transparency. Given the sheer size of this program, the government needs to produce a detailed document outlining how/where/when housing will be provided, how it takes into account urban planning and whether the regulatory and legislative challenges within the housing market will be addressed. It’s almost elementary.
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