State-backed mortgages

The Prime Minister of the United Kingdom David Cameron announced last week that hi government plans to launch a state-backed mortgage financing scheme, with a view to provide homes and generate jobs.
Here in Pakistan, the Prime Minister in-waiting, Mian Nawaz Sharif appears to be considering the introduction of a similar programme. According to informed sources, Mian Nawaz Sharif received a presentation on Tuesday regarding a proposal that would introduce subsidised home loans for first-time home builders.
If the incoming government is indeed planning to launch such an initiative, let it be stated at the outset that the idea is a good one.
However, like most ideas emanating from the banking sector, this one too may be half-baked.
First let’s highlight what is good about the proposal. The construction of homes would generate business and hence employment among dozens of industries including cement, sanitation, electronics, pipes and paint manufacturers and brick kilns.
Since the overwhelming majority of these industries are local, the maximum benefit would be derived by the domestic economy instead of straining the Balance of Payments through schemes like Yellow Taxi Cab which relied on imported cars.
The employment generation that would result as a consequence would also be quite beneficial, especially considering that the growth of the economy has been persistently sluggish in recent years.
But there are also many issues that would have to be addressed, barring which no such initiative can be successful.
Foremost, the government’s fiscal position is already strained. Creating room to be able to contribute towards such a programme would be a testing exercise, at best. State-supported mortgage finance has been successful only in instances where the rates are low enough to be comparable to house rent.
In Pakistan’s Consumer Price Index; house rent along with water, electricity and natural gas has been accorded a weight of 29.4 percent. By that argument, house rent takes up about a fourth of an average person’s disposable income.
Given that banks at least KIBOR + 5 or more, besides requiring significant collateral; the government would be expected to greatly sweeten the deal, if the banks are to take the bait.
Then there is the issue of non-payment. Banks would be loathe to accepting plots in most parts of the country as collateral, given the
plague of unclean titles coupled with lengthy litigation procedures when it comes to taking custody of such properties.
Of course proposals to the Prime Minister in-waiting are dime a dozen at the moment. While bankers would be much enthused, as would prospective home owners; the Finance Ministry and State Bank of Pakistan would have their work cut out, much before the initiative sees the light of day.