Pakistan Government is approaching World Bank for a loan of US $150 million for Pakistan Housing Finance Project for increasing access to affordable housing finance in the country. Update Project Report of World Bank disclosed that the estimated housing shortage in Pakistan is up to 10 million units and the deficit continues to grow, particularly in the urban areas.
While data to capture the existing stock and flux of housing units are limited, existing evidence suggests an existing backlog in housing units that is raising rapidly as the annual number of new adequate units cover less than half of the annual new demand. Estimates of annual new demand range between 400,000 and 700,000 units with only about 100,000 to 350,000 formal units being built annually.
While the magnitude varies, all estimates indicate that formal supply covers less than 50 percent of new demand. Various estimates place the total housing backlog at 9 to 10 million units (of which 3.5 to 4 million units in urban areas), increasing approximately 400,000 units per annum), report added.
WB report mentioned that the housing needs are projected to increase considerably and necessitate large volumes of investment to meet the demand. The country's population of 200 million is expected to reach between 270 and 300 million by 2050. Despite the lack of current demographic data from the census, evidence suggests a large increase in the demand for urban housing over the last decades that is likely to persist at similar levels in coming decades. Over the next 20 years, annual urban population increase is expected to be about 2.3 million per year (around 360,000 households if they remain at 6.5 individuals per household). The demand for urban housing is particularly strong in the largest urban agglomerations such as Karachi that concentrate a large share of the population. A decline in household size and the aging of a large cohort of young individuals who form their own households are expected to further increase the demand for housing, report added.
WB report stated that the Low and Stagnant Investment Rate, however, continues to pose significant challenges to economic growth. After strong growth in FY15 of 13 percent, investment grew by only 5.7 percent in FY16. The ratio of investment to GDP is 15.6 percent-compared with an average rate in South Asia of 34 percent between 2010 and 2015. Pakistan's much lower rate of investment is driven by its volatile security situation, energy shortages and poor business regulatory environment (now ranked 144 of 190 countries), despite recent progress. The implementation of the federal and provincial governments' joint action plan to improve the investment climate will be one important step towards reversing this long-term trend. Pakistan also has very low levels of financial intermediation, which contributes to this situation and hinders its progress towards more inclusive and higher growth, report added.
In 2015, WB report pointed out that the financial sector assets stood at about 68.5 percent of GDP, below that of other relevant emerging markets. Private sector credit to GDP, which declined significantly from 2008-2015, was just 15.4 percent, significantly below the regional average of 47.6 percent.
In the last 25 years, WB report stated that Pakistan's financial sector went from being dominated by underperforming state-owned banks to a modern and sound financial sector dominated by private banks. The banking sector, consisting of 36 commercial banks and 10 microfinance banks, accounts for about 74.7 percent of total assets in the entire financial sector, while the remaining is held by 45 non bank finance corporations (NBFCs), including insurance companies, stock exchanges, pension funds, development banks and a public specialized housing lender House Building Finance Company Limited (HBFCL), a non-deposit taking Development Finance Institution (DFI). The microfinance sector is still relatively small, holding about 0.5 percent of the total financial sector assets, although it has considerable significance from the lens of financial access. The financial soundness indicators show that the banking sector remains profitable with the return on asset ratio and the return on equity ratio, respectively, at 1.5 percent and 15.6 percent for 2015. Banks are also well capitalized with an overall capital adequacy ratio of 17 percent, well above the minimum regulatory requirement of 10 percent. A notable feature of the Pakistani banking sector is the relative importance of Islamic banks. Islamic finance is growing rapidly, and currently accounts for 11 percent of sector assets. However, overall financial intermediation levels are very modest leading to a limited role in contributing to sustained and inclusive growth. According to World Bank Global Financial Inclusion Database (FINDEX), only 13 percent of adults had access to a formal account in 2014, far behind Sri Lanka at 83 percent, India at 53 percent and Bangladesh at 31 percent, report added.
WB report mentioned that Pakistan's mortgage finance to GDP ratio of 0.5 percent is extremely low compared to the South Asia average of 3.4 percent. At the end of 2015, there were only approximately 60,000 residential mortgage loans outstanding for a consolidated amount of PKR 66 billion (US $660 million).
The average for mortgage lending to GDP is 4 percent for comparable countries with neighboring India standing at a relatively healthy 10 percent. At present, only 1,500 new mortgage credits are extended annually in Pakistan. Thus, there is a significant market gap across all segments with the largest market gap for mortgages between PKR 0.5 (US $5,000) and 3 million (US $30,000), ie, between micro credit for housing and mainstream mortgage.
WB report mentioned that the quantitative housing gap is exacerbated by qualitative deficits of the existing stock, such as overcrowding, and the low quality and continuous deterioration of existing stock. Overall, as of 2009, it was estimated that 46.6 percent of the urban population was living in slums or Katchi Abadis, representing 29 million people or 4.3 million households. The share of the population living in housing units classified as slum is therefore well above the poverty rate (36%), reflecting that due to constraint on formal housing supply and the lack of housing finance, the housing shortage is not only affecting poor households but also low and moderate income households. Roughly 200,000 low-cost units are needed annually to stem the growth of Katchi Abadis. For instance in Karachi, a growing number of people - not always poor - do not have other options than live in illegal and substandard slum settlements that now house more than half the population of Karachi today (compared to less than 20 percent in the mid-seventies). Many settlements have structural deficiencies, lack access to basic infrastructure, and lack title or permit. More than 40 percent of the population of Karachi, for instance, is not connected to the main water or sewerage network.
The housing shortage dis-proportionally affects low-income segments. Several elements explain why this is so. First, current housing supply mostly covers price ranges that exclude these categories. Second, the lack of decent housing and financial options for urban dwellers results in low housing quality standards with a proliferation of slums (Katchi Abadis). Third, there is an inverse relationship between household size and income: the lowest 2 income quintiles average (nationwide) 8.2 and 7.4 people per household respectively, while the upper quintile averages 4.8. As a result, low-income households need larger housing units, which increase the challenge of providing them with affordable and quality solutions. There is an acute need to increase the supply of housing in the range of PKR 1 to 3 million (US $10,000 to US $30,000) in the main urban centers, which the population earning between PKR 30,000 and 100,000 (US $300 - US $1,000) monthly could afford. Hence, increasing the housing stock will require a supply side policy including better urban planning, land value capture instruments, mobilization of resources for infrastructure, and support for large-scale, mixed-use developments, which would help increase incentives for developers to supply affordable housing for lower income groups, report added.
WB report stated that the Housing finance is crucial for developing a stock of affordable housing. Lack of housing finance instruments offered by the formal financial sector is an important factor behind the low coverage of housing needs. As discussed above, housing finance remains severely underdeveloped in Pakistan relative to the size of the population and economy. This is despite significant progress in the financial sector under the committed leadership of the central bank, the State Bank of Pakistan (SBP), which has been championing reforms for financial inclusion for over a decade with significant milestones achieved, including on the regulatory framework, credit information, payment and settlement systems and financial literacy. These reforms are inscribed in the National Financial Inclusion Strategy (NFIS) which identifies housing finance as a priority area for government intervention to address the country's housing shortage.
Until 2003, WB report stated that the provision of housing finance in Pakistan was limited to the state-owned specialized House Building Finance Company Limited (HBFCL). Stimulating policy measures, abundant liquidity and declining mark-up rates led to the entry of commercial banks and the market grew rapidly until 2008. But lending for housing was hard hit by the economic crisis in 2007-2008, which resulted in a surge of unemployment and a mark-up rate hike. Some of the major banks withdrew from the market, which has been shrinking since (with the exception of Shariah-compliant home finance). Currently, 25 financial institutions (24 commercial banks, one microfinance bank) and HBFCL, are providing housing finance although relative to needs the volume of financing is substantially inadequate. There are no specialized, non-bank finance companies (NBFCs) operating as mortgage lenders for the time being, as was the case in the early-mid 2000s, with the last surviving housing NBFC being acquired by a local bank in 2007. The market share of private sector banks decreased from 33 percent to 30 percent between June 2015 and June 2016. However, the share of Islamic banks increased from 32 percent to 38 percent during the same period. In fact, the market share of Islamic banks since 2013 almost doubled to 40 percent with the aggregate Shariah- compliant mortgage portfolio of almost PKR 28 billion as at mid-2016.
The few mortgages that are made are largely extended to formally salaried middle class and above borrowers (60% of aggregate portfolio) with the rest of originations going to the borrowers with a business income (non-salaried). Average loan term is around 13 years, average loan to value (LTV) ratio is quite low at 48 percent, average annual interest rate of around 10 percent. National portfolio average loan size is PKR 5 million (US $50,000); the Islamic loan average is twice as much and HBFCL average is PKR 1.8 million (US $18,000). Variable rates, non-standardized underwriting practices, and significant maturity mismatch expose primary mortgage lenders (PMLs) to higher credit and liquidity risks which are reflected in higher spreads charged on mortgage loans, and higher non-performing loan (NPL) ratios. The rate of NPLs, although decreasing, remains abnormally high despite the small size of the market - over 13 percent for the industry in terms of amounts outstanding, with a higher figure for HBFCL (28.5 percent) despite a sharp decline in the recent years, and a much better performance of Islamic banking (7 percent).
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