Casino economy?

Pakistan’s economy bounced back during FY21 after a lull of two years. The government is striving to have business friendly policies. Over billion-dollar long-term subsidized credit for plants and machinery has been availed by industries. A few new ventures are kicking in and others are in planning stage. New listings are happening on stock exchange. Construction activities are at an all-time high. However, in quest for promoting businesses by lowering interest rates and supporting markets, an unintended consequence is heightened speculative activities in various asset classes. It appears that casino culture is penetrating real estate, stock market, and other short-term bets in trading of new automobiles and commodities. Investors are getting impatient. ‘Double Shah’ kind of mentality is growing fast. This is not healthy.

Money is like magnet. More you have, better is the pull force. The difference between haves and have-nots is growing. Affordability is becoming dearer. Government is letting rich to make money while supporting poor though direct cash and other subsidies. The urban middle class – already squeezed in Pakistan - is burdened under inflationary pressures. The government needs to realize that without developing a vibrant middle-class, no economic model is sustainable.

Real estate prices are increasing at a rapid pace. Investors are buying plots and apartments in lots. The story of stock market is similar to on where unknown and bankrupt companies are becoming darling of retail investors. Returns for investors in selling new cars on premium (on money) is exuberant. Today investors (punters) are high on returns, and the genuine buyer of homes and cars are paying unnecessary premium. Market is clearly distorted.

This all started with the real estate market where illegal wealth was sanctified through amnesty schemes. Then the easing policies to counter Covid-19 are also contributing to a bubble. Globally, money is cheap and irrational investments are making killing returns. In Pakistan, cheap credit is making investors leverage to the teeth and that is working so far. The regulator (SECP) is conveniently ignoring the casino mode.

PM’s objective of promoting construction is to bridge the supply gap of millions of houses. However, real estate prices for genuine buyers are becoming dearer. Mortgage is not becoming viable even at lower interest rates. Back in the day, every bank employee used to mortgage house as the rates were subsidized by his employer. Today, that facility is available, but even cheap loan is not enough for mid-level bankers to afford mortgage as housing prices have gone through the roof.

Real estate prices of plots and files are witnessing exuberant increases. According to Zameen.com, real estate index (based on listing pricing, not actual transaction prices), prices in DHA Lahore Phase 7 and Phase 9 Prism increased by 77 percent and 66 percent respectively in the last 12 months – market anecdotes suggest that price increase is even higher. Big boys are making money and the affordability objective seems to be lost in between.

New commercial and residential buildings are pouring in. Everyone with money wants to become real estate developer. Developers and housing authorities encourage ‘satta’ in their buildings and societies. Investors come in and fund the working capital. Higher activities churn volumes and the likes of DHA make money on transfers. In the end, properties become dearer for homeowners. Even with low interest rates and push by regulator for banks to offer home loans, the affordability matrix is becoming unviable.

Investors are taking possession of all the new developments while deserving are deprived. An even bigger game is in investment in plots and files with only trading activity. The mantra of 35-odd industries churning with housing is overrated. The labour is engaged for the time of construction cycle. No jobs after that. Empty buildings can become ghost houses and ghettos. In contrast, if that money is invested in manufacturing industries, construction jobs will be replaced by durable employment in factories. Provincial governments should have higher taxes on land holdings. Do not let it remain a free parking lot for wealth.

The story of stocks is even more of a casino setting these days. Memons from Karachi are rejoined by young rich Punjabi boys of Lahore, Faisalabad, and surroundings. Stocks are cornered. Smaller the free float, easier it is to manipulate. In 2021 to-date, top 25 performing companies have exhibited returns of 100-500 percent. Some of these companies are non-operational or loss-making. There are (fake) stories of turnaround. Words like blockchain, artificial intelligence are used to inject life into dead stocks. Any company (irrespective of its core business) which is selling real estate is rocketing. With low free float these can be easily cornered, and investors can manipulate. Pumping and dumping is becoming a norm. SECP is just a spectator. What will it take to wake up the regulator?

Businesses are pressurizing for low interest rates, and the country has negative real rates. That is encouraging leveraging and investing in riskier assets. The phenomenon is evident in cars market too. The capacity utilization of the industry is around 60 percent. None of the player is running on full capacity. Yet virtually every car is selling at premium. Dealers and investors collude and book cars and while real buyers must either wait for long periods or pay hefty premium to get instant delivery. For example, as per Pakwheels listing, the premium (on money) on a newly launched Hyundai Sonata is Rs1 million or 12-15 percent of the price. At one end, the government is lowering duties and taxes to bring ex-factory prices of automobiles low, on the other hand, opportunists are making money due to impatient buyers.

In a nutshell, it is a joy ride for risk takers and short-term opportunists who have liquidity or access to cheap credit. Inflation is hurting middle class and poor alike. Burden of exchange rate adjustment, spike in real estate prices, increasing electricity prices, rising food prices and others for those who are living on monthly pay cheque. PM IK should take notice of these anomalies and bring policies for broad-based economic growth and create a mechanism for consumer protection.

Copyright Business Recorder, 2021