There is no dispute on the housing shortage and on the pressing need to fill in the gap. The agenda of building housing was presented by PPP (2008-13) and PMLN (2013-18) governments but it failed to move from policy rooms to constructing houses.
Now the PTI has come up with a housing policy with a promise to construct 1 million houses per year. On the face of it, the commitment seems stronger than predecessors and the need is even more pressing today as the gap has widened in the last decade.
Without delving into the number game; the focus should on the methodology to build housing supply momentum. The aim should to on how to provide the enabling environment for builders to construct and for households to afford.
It is pertinent to note that supply should not be confined to urban centers as the shortage is across the board. The PTI policy is clear on it, as it envisages to construct 40 percent housing in rural, 20 percent in peri-urban and 40 percent in urban areas.
The question is what is required to be done and why the gap is expanding. The demand of housing is there but the supply is at a price which makes it unaffordable for majority. Hence, limited supply in an inefficient market is the outcome. The need is to bring efficiencies in the sector to make it affordable for millions of households across the country.
It is not the job of government to construct housing schemes themselves as neither there is fiscal space to provide financing nor the technical capacity to execute. All what is required by government is to provide an enabling environment which creates commercial sense for builders to provide solutions including low cost housing, and to provide housing finance for buyers at affordable rates to generate demand.
There are three key elements in the housing matrix - cost of construction, cost of land and affordability of the buyers. The adjustments are required in all the three to boost the sector. The cost of construction can be reduced by abolishing indirect taxes on construction material, services, and income tax incentives for builders engaging in low cost housing.
Apart from these, the cartels in the industry should be abolished by enabling competitiveness in the 30-40 allied industries associated with the construction. For example, cartel in cement is known to all; the story in steel is not different. On the other hand, tiles manufacturers are facing huge challenges from dumped Chinese goods.
The need is to carefully design policies to bring efficiencies in the construction material and services providing industries to not only lower the cost of construction but also to bring innovation in the housing construction and allied industries.
Once, the housing sector gains momentum, private sector builders may bring modern technologies in the sector. Prefabricated housing units are gaining traction in the world; all the investors need is scale to invest in prefabricated and 3-D printing technologies. All these factors together, can substantially reduce the cost of construction in the industry to make housing affordable.
The second factor is the cost of land which has multiplied in the last decade, making housing dearer for many. The rise in prices is already arrested in the last two years by introducing FBR valuation table and the fear of taxmen asking questions from speculators. But the flipside of it is that market has become dead in the process.
For housing to spur, a vibrant documented real estate market is imperative. The new rules of non-filers not buying property will dis-incentivize speculators further. But all these would not help lower the prices of limited land supply.
The need is to enhance the supply by creating land banks. The need is to have a government entity focusing on conversion of vacant, abandoned, delinquent and unutilized land into productive use - to unlock the land potential. And once the land is awarded to a developer, he should not be allowed to sell undeveloped land into the secondary market to arrest speculative interests. Plus, there should be conditions of developing certain percentage of land for low cost housing.
These steps are not being advocated arbitrarily; there are successful models in other economies where private builders develop housing on land provided by government. There are public-pubic, public- private and private-private models which can be implemented. The bottom line is using unutilized land can lower the pricing of land by enhancing supply.
Yes, the key to its success is lowering the cost and time of doing business. Right now, it takes months (6-18) for taking necessary government approvals for any mega project and it usually involves hefty bribes to land administrative authorities. The need is to have a one window solution that swiftly approves the design and other elements without any bribe.
Apart from that, land zoning laws in urban centers ought to be aligned to the density of cities. For example, the zoning laws in Lahore are old and were developed for a low dense city; but the city population growth is the highest in the country and the laws are required to change to promote vertical development. Similar, the need is more pressing in Karachi.
The third and most important element is to have affordability. Lowering the cost of construction and land can help this a bit but still there is no way millions of households can buy houses on cash. There is neither any model in the world to support buying of housing on cash nor do the buyers have enough cash to do so.
The key to spur demand is by promoting mortgage financing; and in case of low income housing, spur the rental development models.
The challenge in housing finance is immense and without promoting it, none of the housing supply model can meet demand.
The housing finance by specialized institution (HBFC) and commercial banks combined is too low and concentrated in big urban centers only. Currently around 50-60 thousands houses are financed in Pakistan while the incremental financing per year is mere 2.5-3 thousand houses.
That is too low a number; and requires long term bond and other changes in the banking system to spur housing finance. One thing is clear that without boosting housing finance; providing housing at a large scale is nothing more than a day dream. More on the housing finance later.
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