Blessed are the ones who own a house in Pakistan. Its ownership was already out of reach for most of the countrymen, but the way prices have escalated during the last two years or so, it has become impossible even for the more affluent to venture into such an undertaking.
The prices of residential plots, in particular, have shown a spectacular increase, upsetting all costing projections of commercial builders as well as individuals.
This has been happening in the backdrop of banks wallowing in excess liquidity and people looking for profitable areas of investment after a dramatic fall in banks' deposit rates and lowering of returns on various instruments of NSS.
Speculation was also a contributory factor and, according to knowledgeable sources, speculators at present outnumber genuine buyers.
When prices double almost every year, investors join the race to make a quick buck, thus accentuating a cycle which gathers it own speed in a short period of time.
While all this was happening, the government behaved like a helpless by-stander despite its declared policy to promote the housing sector to provide shelter and increase employment due to the vast linkages of construction industry with other sectors of the economy.
It appeared as if public authorities were not even able to check the malpractice's of fake housing societies and developers who were out to deprive the ordinary people of their hard-earned money.
In this kind of environment, the State Bank decided to play its role and stopped banks on 5th October, 2004 from providing housing loans exclusively for the purchase of land.
According to its circular, "the banks and DFIs will not allow housing finance purely for the purchase of land/plots; rather such financing would be extended for the purchase of land/plot and construction on it."
To ensure that the instructions are followed in letter and spirit, the State Bank advised that the sanctioned loan limit assessed on the basis of repayment capacity of the borrower, value of land/plot and cost of construction on it etc should be disbursed in tranches, ie upto a maximum 50 percent of the loan limit can be disbursed for the purchase of land/plot, and the remaining amount be disbursed for construction thereon.
Further, the lending bank/DFI was required to take a realistic construction schedule from the borrowers before allowing disbursement of the initial loan limit for the purchase of land.
At first glance, the State Bank's decision not to allow financing exclusively for the purchase of plots appears quite relevant and effective, and in fact was hailed due to its capacity to curb speculation in real estate which is perceived to be the main factor for the recent rise in property prices.
Also, by redirecting credit from the real estate business, the move was supposed to have a profound impact on bourses and productive activity because of higher availability of business and consumer loans.
However, at a closer look, the measure is not likely to be of great significance in reducing or stabilising the plot prices.
This may seem odd, but households in Pakistan, contrary to the developed countries, are not in the habit of borrowing from banks purely for the purpose of buying land/plots for residential purposes. One may look around to verify this fact.
The State Bank and scheduled banks provide such a facility for their own employees but its impact is limited and it has not been prohibited.
The data released in its current format by the State Bank would also not exactly reveal the effectiveness of this measure because of incomplete coverage.
According to classification of advances by borrowers, figures only for total lending against construction and real estate under the head 'commerce' for private sector upto June, 2003 are available, which show that advances for these purposes were more or less stagnant at around one percent of the aggregate bank credit.
Since most of this amount is claimed by construction, the irrelevance of the present measure, except for conveying a signal to the market, is obvious. It does not mean, however, that prices of plots would continue to rise indefinitely.
Every bubble is destined to burst some time. It is pertinent to note here that, according to the State Bank data, about 21 percent of the total bank advances are secured by pledging real estate but this only means that immovable property was mortgaged with the banks to get loans of the equivalent value which are generally used for some other purpose and, therefore, not relevant to the context. Banks are concerned more with the recovery of loans rather than the end-use of credit.
While this measure in itself may have hardly any impact on plot prices, the State Bank unwittingly seems to have done quite the opposite by liberalising the rules for granting personal loans simultaneously to banks' customers.
It has raised limits for credit card financing upto Rs 2 million for such customers of the banks and DFIs who have "extraordinary strong repayment capacity, moderate debt burden and clean track record." However, while availing of the benefit of this provision, banks/DFIs would place on record well-defined criteria for terms "Prime Customers" and "Moderate Debt Burden" approved by their Boards of Directors/Chief Executives.
The banks/DFIs may also allow financing under personal loans in excess of Rs 500,000 (upto Rs 1,000,000) to other customers as well, provided the loan is appropriately secured. Obviously, permission to the banks to extend personal loans up to Rs 2 million and Rs 1 million as against the present limit of Rs 0.5 million would facilitate them make larger personal loans.
It is to be noted that personal loans are already increasing at a very fast rate due to the ceaseless publicity of the banks to grant auto, mortgage, and other consumer loans and growing popularity of plastic money.
During July-March, 2004, private sector credit distribution showed that Rs 50.1 billion were granted as personal loans as compared to only Rs 19.0 billion in the corresponding period last year.
The State Bank may believe that excessive growth in personal loans would boost consumer spending but since the purpose is not exactly determined and monitored, higher liquidity at the disposal of households may very easily find its outlet in the real estate market and thus further accentuate higher price trends in this sector.
Increase in personal loans could easily more than compensate the fall in the credit off-take purely for land purchases.
The State Bank and government authorities need to trace out the origins of high real estate prices in order to devise appropriate policies.
The basic reasons for this phenomenon appear to be high level of liquidity at the disposal of a category of households, lack of investment avenues in other areas of the economy and increased speculation in this particular sector.
Some sections of society at present are wallowing in liquidity due to record level of home remittances from abroad.
Expansion of private sector credit in the recent past has been at its peak and a part of it might have been diverted to the real estate business. Some sections of unorganised sector have also witnessed a boom leading to higher demand for residential plots.
Rich people in general are shy of investing in the manufacturing and other productive sectors due to the law and order situation and overall uncertainty prevailing in the country.
NSS are not attractive instruments any more after a drastic fall in their rates of return.
Net yield on bank deposits is negative. Speculation in real estate has gained its own momentum due to quick increase in its prices, partly attributable to herd mentality usually found in our setting. Historically also, the appreciation in real estate has been greater than the rate of inflation and the rate of return offered by banks on deposits.
It could, however, be very well argued that State Bank's role in influencing the behaviour of plot prices is rather limited.
It could only give a signal to the market by stopping the flow of credit for a particular purpose, which it has already done and is by raising interest rate on deposits so as to make this alternative investment avenue a little bit more attractive. But raising of interest rate has a number of other dimensions and is subject to a set of different factors.
Therefore, its upward adjustment merely for the sake of lowering plot prices is neither advisable nor possible.
In all fairness, the lead provided by the State Bank has to be picked up by other government departments if reducing plot prices is perceived to be the desired goal. Tax officials could play a very important role in this respect by being more vigilant.
They could ask all the real estate agents, land developers and housing companies to disclose the names of plot buyers and sellers so that sources of income through which these transactions are taking place can be properly ascertained and monitored for tax purposes.
Some of them, in fact, do seek such information. However, they are severely constrained in getting this data from Defence Housing Authorities (DHAs) which simply refuse to provide this information with impunity.
The Central Board of Revenue, for reasons that are too obvious to be dilated upon, is hesitant to tread this path.
After a lot of effort the tax official were able to overcome the stonewalling by DHA Karachi that condescended to provide the sought information about its members but only about those who are not serving in the 'Armed Forces'.
Most of the money going into real estate business is tax evaded.
In Pakistan, it is very difficult for a household to have white money in millions of rupees to play around when the risk is also known.
Also watchdog organisations like KDA and registrars of co-operative societies could be asked to do their jobs properly.
They need to make arrangements to develop the dormant societies and provide the required infrastructure to reduce the severe housing shortage and increase the supply of developed plots in the market.
One could easily see hundreds of cooperative housing societies lying dormant in Scheme 33 on the Super Highway in Karachi for the last 30 years, with no prospect of development in the near future, while prices in DHA, CDA and Navy schemes are skyrocketing where titles of land are also relatively free from disputes.
Last but not the least, plot prices would automatically come down if investment in other avenues could become relatively more attractive but that is a long story and also a reflection of poor policies.
Even top people in the government use all their influence to get a residential plot instead of thinking about establishing a manufacturing concern which may yield greater dividends for themselves and the country on a long term basis.
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