Housing thrust - the long mile

The prime minister is striving to rollout his ambitious construction and housing project. An amnesty scheme has been announced with no questions asked on sources of investment till Dec 2020. On Friday, PM announced loans at lower markup for consumers to push-start low cost and affordable housing. With attractions both in supply (through amnesty) and demand (through affordability), it is likely that the first wave of housing shall start soon.

However, without market-based solutions and institutional mechanisms to resolve regulatory impediments, the party could be short-lived. The housing shortage is estimated at 10-12 million and is growing. The markup subsidy for 100,000 houses would only meet one-third of incremental shortage every year. But it is an unprecedented move - construction of 100,000 five marla (125 sq. yard) houses in one year can create 200,000 direct jobs for masons, carpenters, and plumbers, etc. The skillset is low and could be easily learned and will provide jobs to low skilled workers who have lost jobs and are facing economic stress caused by Covid-19. Moreover, there are 40-50 allied industries to benefit from construction, most of which are SMEs.

For the scheme to take off, the institutional mechanisms need to be formed to promote builder & developer financing as well as consumer house financing. Three main missing pillars are foreclosure laws, Real Estate Regulatory Authority (RERA), and computerization of land records (land registry). Without these, banks would remain reluctant to extend finance to both builders and consumers. And not all challenges fall under federal government's ambit. Foreclosure frictions need to be removed by courts whereas land registry is a provincial subject. That is why formation of National Coordination Committee for Housing, Construction and Development which plans to take provinces on board is a welcome move.

The federal government has budgeted Rs30 billion for low-cost housing this year. The contours of this subsidy are now taking final shape. It has been decided to give Rs300,000 upfront for principal payment for low cost housing units in price range of Rs2-2.5 million. For example, if a unit costs Rs2 million, buyer will pay Rs200,000 and government will pitch in Rs300,000 to make down payment for loan at Rs 500,000. The remaining Rs1.5 million will be financed by banks at 5 percent for consumers - difference between rates (usually Kibor+3 to 4 percent) shall be subsidized by the government for five years.

There are two elements to the subsidy. One is Rs300,000 support in down payment for first 100,000 low cost houses -Rs30 billion has been budgeted to this effect this year. The second is markup subsidy for 5 years - which has so far not been budgeted for. Moreover, the PM has announced markup subsidy for low middle-income houses - 5 percent finance rate for 5 marla (125 sq yard) houses, and 7 percent for 10 marla (250 sq yard) houses and apartments of similar covered areas. The loan amount for 5 marla house is to be capped at Rs 3 million, and for 10 marla at Rs 5 million, respectively. There should be some cap on property prices as well so that the affluent cannot get these loans.

The government has attempted to address the affordability issue through these subsidies. Affordability is globally measured at households paying 30-35 percent of disposable income on housing in mortgage payment or rent. Mortgage financing is an alien concept in Pakistan where out of 32 million households, less than 100,000 are served by banks. The housing finance within banks is mainly for own employees - Rs145 billion loans rolled out to its own employees versus Rs83 billion for rest of the country.

Nowhere in the world has any housing market flourished without a vibrant housing finance market. In Pakistan, house buying is mainly on cash or at instalment plans offered by developers (with no protection of customer advances). That is why supply is mainly for the affluent segment - while the shortage is in lower income brackets.

Banks are reluctant to finance; while buyers cannot afford at high and volatile rates (interest rates varied between 6-15 percent in past 12 years). The financing demand must be tackled by an initial push. And the supply must be ensured by having banks on board.

To ensure buy in of banks, foreclosure laws need to be introduced and implemented. This will allow banks to evict defaulters of loans. Right now, courts' tilt seems to be towards consumers. The only law that existed to this effect was stuck down by Supreme Court in 2014. A new law was later introduced; but was challenged in Lahore High Court. It got cleared but is now stuck again at the apex court. The country will benefit if 'balanced' laws are made to spur housing market.

The PM has also announced that banks shall extend 5 percent of loans to construction including builder financing. But builders operate in shadows. They start a project with own equity and get the consumer (second layer of investor) installments to finance the project. The usual method is that builders recover own equity out during the project (from customer installment payments) and pass on the risk to customers. Banks are not comfortable with this method Moreover, there is no consumer protection body. To this end, formation of RERA to safeguard consumer deposits through escrow accounts and rating/licensing of builders, is imperative. RERA is critical for boosting construction. There are numerous examples in the world, including the UAE and India of successful RERAs.

Land for housing is also expensive, whereas land banks do not exist either. Land titles are largely not clear, and banks are reluctant to offer housing mortgage. This can be dealt with through digitization of land records. It is a provincial subject, and some strides have been made in both Punjab and Sindh to this end - but more is required. The traditional Patwari system is a big hindrance. Land digitization and revision of zoning/by-laws (in favour of highrises) can unlock land value. For this, condominium laws are required to be formed and implemented.

Once these prerequisites are met, housing and builder finance markets will hopefully witness a significant growth spurt. There is an issue of long-term funding for banks to finance long-term housing loan assets. This cannot be done in a day. Pakistan Refinance Mortgage Company (PMRC) has been formed to fund these gaps. Nonetheless, without a vibrant debt capital market, fixed rate long-term mortgages at large scale would remain a pipedream.

Last but not the least is affordability for low-income households. These cannot afford mortgages even at subsidized rates. The government is piloting monthly instalments of low-cost housing (Rs2-2.5 million) through principal and markup subsidies at Rs12,000-13,000. But the government cannot scale this for the planned 100,000 houses. For the remainder population, this can be dealt with by creating a vibrant rental market.

The rental laws also need to be revised by having court registrars to decide on eviction based on stipulated rules. The challenge is that tenants can always take 'stays' against evictions. If this is rectified, developers can find commercial viability in low cost rental housing market. Banks will be more willing to finance it as well.

In a nutshell, there are numerous challenges in achieving the dream of a vibrant housing market. The PM is doing it right by trying to push start the market. The process must continue, and all the requisite steps must be taken soon before the thrust for building 5 million houses is dead.

Copyright Business Recorder, 2020