The rising housing gap in Pakistan is a substantiated fact, even if it is overshadowed by other pressing issues facing the country. Estimations based on outdated data suggest the shortage across the country should be between 10-12 million houses. Meanwhile, mortgage financing remains insignificant at less than 0.5 percent of the GDP (CY17: 0.2%; peak CY07: 0.7%). Lack of financing options and the speculative nature of the real estate prices allow only cash-based buyers to purchase property mostly belonging to high-income households. The mid-to-low income ones end up relying on the rental market which is itself undeveloped and under-regulated. To respond to this sobering tale, the SBP recently published its first policy document for the promotion of housing finance in Pakistan.
The document is needed, and welcome. Though, it is a pity that shortage numbers quoted by the SBP are taken from a World Bank study on South Asia dating back 2010 and more accurate measures of demand—urban as well as rural—are not available. But the Central Bank accurately pinpoints some of the major demand/supply side issues in the market including weak foreclosure laws that ultimately lands most disputed cases in the courts, absence of automated land records and registration, and high costs associated with registration as well as acquisition of lands which are not efficiently allocated leading to cost overruns.
The document emphasizes on the risk averseness of banks not willing to take a chance on housing finance in the face of weak regulatory and legal environment and past experiences of high infections. It should be realized that the challenge is not only for banks and other institutions to bring financing to home buyers or for builders to supply these low-cost housing projects but for regulators to provide an enabling environment to allow the supply side of the equation match demand.
Under the policy, the SBP will, among others, promote housing finance companies, provide targets to banks for low-cost housing finance, upscale finance limits for microfinance banks and help implement the amendment to Financial Institution (Recovery of Finances) Ordinance (FIRO) which will make willful defaults an un-bailable offence.
To boost affordability, the SBP will introduce a subsidized financing facility for low-cost housing that will provide liquidity to financial institutions that can extend mortgage loans. The facility also promises lending to builders and developers for the supply of low-cost units.
The latter is indeed an important development since builders and developers across the country simply do not have the incentive to provide to the low-cost market. They finance land costs mostly through equity while initial construction is financed through investors at concessional rates. Customer advances finance the rest of the project costs. With bank financing at their disposal, they can finish projects faster, get higher returns by cutting off the investor element.
This however would require incentives and restrictions. SBP proposes that in an open-bid project, the land can be given free of cost to developers that make at least 50 percent units in low-income category—whosoever bids the highest. Subsidized and regulated land ensures the eventual price tag of the home would be significantly lower than market options available. These public-private models have seen some success in the past and are similar to cross-subsidy models where builders earn a higher return on some units which finances the low-cost units. The government’s involvement means even better returns, higher utilization of land and development of undeveloped areas.
Ideally, these incentives should come with a stipulated time by which the project needs to be completed, or time restrictions on difference stages of construction. Builders shouldn’t be allowed to sell undeveloped land and in cases where there are time lags, the land can be taken back and re-auctioned. Strong titling and land registration regulations should be front and center.
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