Mortgage finance market: $3.8bn additional loan volume can be created, says World Bank Group

ISLAMABAD: An additional loan volume of $3.8 billion can be created in the mortgage finance market by existing and new housing finance players, to serve approximately 0.5 million customers, says the World Bank Group.

The International Finance Corporation (IFC), a member of the World Bank Group in its latest report “Pakistan Housing Finance, is there a business case for financial institutions?” stated that there is a high demand for housing units from Pakistan’s low-income segment, however, the current supply is negligible. Only one percent of the housing supply caters to 68 percent of the population earning a monthly income of up to US$ 188.

Most of the housing supply targets the high and affluent class in line with commercial viability and affordability. Approximately, 56 percent of housing units cater to 12 percent of the population earning a monthly income of more than US$ 625. Housing Finance (HF) has the potential to expand in Pakistan, it added.

The IFC undertook this study to underline the volume in mortgage finance market that could be tapped by expanding portfolios across different income segments in small, medium, and large cities to help realize the full potential of the opportunity in Pakistan’s housing finance sector, IFC. The study also focuses on potential returns on assets that could be achieved on mortgage finance portfolios by banks/DFI.

It further stated that despite a low national mortgage/GDP ratio, Financial Institutions (FIs) (except for the House Building Finance Company Limited (HBFC) are only limited to Tier-1 cities for their mortgage finance products.

With the appropriate products, systems, and funding, mortgage finance can be expanded to 26 cities (Tiers 1, 2, and 3), with the potential to reach approximately 500,000 additional clients across different income segments.

The report noted that the Pakistan Social and Living Standards Measurement (PSLM) surveys and banks/DFI outline the customer segments according to their monthly income: Upper: US$ 6,250+ Upper Middle: US$ 3,125-6,250 Middle Middle: US$ 688-3,125 Lower Middle: US$ 250-688.

The government of Pakistan is currently providing a mark-up subsidy for housing finance whereby housing units of up to 250 square yards and flats/apartments with covered areas of up to 2,000 square feet are being financed by the FIs for first-time home-owners.

The finance carries a subsidized pricing of up to 9% per annum for a maximum tenor of 10 years and a maximum loan size of US$ 62,500. The markup subsidy scheme is complemented by provision of low-cost housing to low-income groups by Naya Pakistan Housing and Development Authority (NAPHDA), where housing finance is available from FIs for a maximum amount of US$ 16,875 for a unit of up to 125 square yards and flat/apartment with a covered area of up to 850 square feet.

However, the opportunity in housing finance is not just limited to income segments currently covered by the markup subsidy scheme. Even if the whole markup subsidy allocation is utilized by the banks to build mortgage portfolio, an additional opportunity of US$ 1.8 billion will remain untapped across upper middle-income segment. This segment will have better Returns on Assets (ROA) along with lower risk of default, the report noted.

Pakistan’s housing supply across all tiers and locations in 26 focused cities is above US$ 18,000 on average. A supply of affordable housing units/apartments (up to 125 square yards) is as critical as affordable mortgage financing. Without adequate affordable housing supply, a “housing for all” agenda could be difficult to achieve.

Assuming a higher degree of credit risks as compared to other lending segments, average returns on low-income mortgage finance portfolio (currently also covered under mark-up subsidy scheme of the Government) could be up to 2% per annum. In addition to ROAs, such mortgage financing could also offer product cross-sell and higher business growth opportunities. ROA on mortgage finance to income segments other than those targeted by the markup subsidy scheme could range between 3.50%-4.75%, as estimated from the analysis of FIs’ returns on existing consumer mortgage finance portfolio. This also includes the returns on developer finance. Moreover, mortgage finance products could also be expanded to cover internal employees of FIs, leading to higher staff motivation and retention.

The report noted challenges in housing in Pakistan including lack of affordable housing supply issues with land titling, registration, administration, and recordkeeping limited medium- to long-term funding for on-lending purposes for mortgages, nascent capital markets for raising long-term funding, limited capacity of Financial Institutions to offer and manage housing finance.

The urban population is around 25 percent. More than 208 million people, expected to double between 2030-40. The Mortgage-to-GDP ratio is 0.3 percent in Pakistan whereas in South Asia’s average is 3.4 percent. The current housing deficit is over 10 million units which is expected to increase by 0.4 million units per year.

Copyright Business Recorder, 2022