Say yes to housing!

The hot topics last week was going to the IMF and currency depreciation; when it instead should have been the ‘Naya Pakistan Housing Project.’ The quality of media debate could be gauged from the fact that TV anchors and opposition leaders alike were attacking the 5 million houses number; and not much was deliberated on the much needed housing and its impact on masses.

Yes, five million houses in five years is more of a political slogan. The existing stock of pacca houses in Pakistan is 4.9 million and it is a pipedream to double it in five years. Putting the tall clams aside, it's a great imitative and a much needed intervention to plug in the perceived gap of 9-10 million units.

Half of the country’s population lives in slums; while even in pacca houses, on average, 4.3 people live in a room versus 1.1 in developed world. There is no debate on the shortage and nothing substantial has been done in this domain. The political slogan of 'makaan' was first raised by ZA Bhutto in 1970s and ever since it has remained a mere slogan.

Previous two successive governments came up with some kind of housing initiative; but virtually nothing materialized, apart from a housing society here or there. It seems that first time in the history of the country, any government is serious in providing affordable housing, especially to low income households.

This should be applauded and the focus should be on the models PTI is eyeing upon and on the muscle of financial institutions. One estimate is that currently 250-300k houses are constructed per year in Pakistan, while the formal mortgage is available to mere 2.5-3K (1 percent of out of the pool). Out of total 4.9 million housing stocks, existing mortgaged properties are mere 50-60K.

The numbers are out of proportion and only the demands to buy houses on cash are met. The affordability of households to own houses can increase by reducing the price of a unit and by expanding housing finance facility on monthly installments.

The government does not have money to spare on housing and it does not intend to do so either. The housing projects are to be developed on pubic private partnership with the government tasked with creating land banks and offer an enabling environment for builders to construct with their own capital and risk. Concurrently, the housing finance market is to be developed by creating long term funding (and by creating long term yield curve), creating refinancing facility and improving much needed foreclosure laws.

A 17 person task force of Naya Pakistan Housing Project is in the process of making which would have representation of private sector (builders, financiers and housing experts) and from public sector to form a strategy to move forward. There is no concrete plan at the moment and the government would learn by doing.

Let’s attempt to spell the concerns of critics on the success of the project. The first question is creating land banks. The state owns big chunks of land across the country and that can be used to develop housing. One caveat is that majority of land is owned by provinces. How can the federal government run the projects? This issue can be resolved in three provinces where PTI either has full or partial control.

The other problem is that the abundant land is either in rural or peri-urban areas; how can government produce housing in big urban centers. The plan is to have 40 percent housing in rural, 20 percent in peri-urban and 40 percent in urban.

The challenge for the government is to provide road and other infrastructure facilities in non-urban housing to not let these become ghettos or ghost houses. The need is to have good schooling , medical facilities, transportation and economic opportunities for people to opt for non-urban housing as there is a need for reversal of urban migration. There are hidden costs to it, which the task force is required to be dealt with.

And what about the land for urban areas? If the plan is to convert slums to pacca housing; how will they accommodate the millions living there? There will be resentment from those living in slums and the government needs to have sound plans to counter it.

The next question is how to price the land as according to white paper on the PTI website, the land price is to be borne by the consumers. The bid for developing will be given to the eligible builder and the land would be eventually transferred to end consumer.

If the government supplies more land for housing, cost of land would go down for not only the new allocated land but also for the existing land which bodes well for end consumers. And the speculative interest could be arrested by not allowing land transfer for certain stipulated period of time. The tentative plan is to disallow end consumer to sell land or even give power of attorney for first five years.

The other point is to bring efficiencies in construction. There exists cartels in cement and steel industries - Pakistan cement is exported to Afghanistan and other countries at 20-30 percent discount to domestic prices (after adjusting for taxes). Why is the Pakistan consumer paying high price? Similarly, steel in domestic industry (which is not of best grade) is at 30-40 percent premium to better quality, which can be imported from Iran.

There are efficiencies that can be achieved by standardization in construction and designing and by bringing modern construction techniques home. All of this can reduce the cost of construction by 20-30 percent from existing levels. Plus, in case of low cost housing, government can forgo its taxes and duties which can further lower the cost.

Thus, the overall unit cost (including land and construction) can be reduced if the policy is implemented in letter and spirit. This can increase the affordability to enhance the demand from existing annual production. The government’s focus is to construct only low cost housing while the market is to be created for others.

The cut off price would be at Rs2.5 million per unit for the government to provide. However, affordability can only multiply by introducing mortgage market. India has done that in the past ten years where the mortgage financing increased from 1 percent of GDP to 10 percent of GDP.

In case of low cost housing, government would have a subsidy mechanism without taking money out of fiscal kitty. One of the member of the to-be task force told BR Research that the SBP is making a fund of Rs250 billion for mortgage refinancing to banks and NBFCs. The SBP can create this money. The plan would be to provide this to banks for low cost housing finance at 1 percent and banks/NBFCs can charge 2 percent spread to lend at 3 percent.

Half of financing for each house would be at 3 percent. The rest will be provided by banks at market rates which is around K+3. The SBP may make it compulsory for banks to allocate 5 percent of their advances to low cost housing mortgage - the sum in today's numbers is Rs350 billion. This makes the total money available for housing finance at Rs600 billion against existing mortgage market of Rs86 billion.

At today's interest rates, the mortgage is being offered at 12-13 percent and taking SBP money into account, the average cost of mortgage for low cost housing comes at 7-8 percent. This mechanism coupled with lower unit prices by bringing efficiencies would largely address the demand side affordability issue.
But there are supply side (banks) issues which have hindered the mortgage market growth. One of the prime reasons for banks' reluctance is poor foreclosure laws. Tenancy laws favour the consumer as bank cannot auction the mortgaged property without winning the case which takes years to settle. This may create an environment of willful default and banks might stay reluctant.

The good news is that there is some progress in this regard, and a law may well be formulated soon. The challenge would be implementation. If that problem is resolved, the banks’ financing to middle and upper middle class housing would increase significantly too. The banking sector has given 45-50k car loans last year and it can have similar number for housing loans if the foreclosure laws are resolved.

The other challenge is the asset liability mismatch for banks as the liabilities are of short term while housing assets are long term. The need is to create long term saving through creating pension, retirements and insurance schemes for masses and use that money for lending to long term housing finance. Easier said than done though.

There are numerous challenges in supplying housing from creating land bank to regulating builder to improving zoning laws to bringing efficiencies in construction to creating demand through affordable mortgage to improving supply of financing by creating long term funding to improving foreclosure laws.

The first year would be spent in creating an institutional framework. The government should form a strong real estate regulatory authority to address numerous issues in development of housing. Once that step is done and affordability is created, the private sector will find a market in low cost housing. Once done, the government’s role would be limited as a regulator and the private sector will keep on churning housing itself in years to come.