November 20, 2006	Monday	Shawwal 27, 1427

THREE years ago, the State Bank started allowing banks to provide loans for purchase of land and construction of houses and billions of rupees were lent for the purpose in all the major cities.

Immediately, the prices of land and houses soared up to skies as millions of people wanted to build a house of their own or make investment in real estate.

Actually, it all started with the lowering of interest rates when they touched the record low levels in 2003 and 2004. The SBP issued a circular allowing banks to lend money to those who wanted to buy land or build a house and this coincided with record credit flows to the private sector.

But these loans for land buying were for a brief period. When the property prices hit the roof, the decision had to be amended.

This amendment, issued in October 2004 stated that the banks and development financial institutions (DFIs) will not allow housing finance simply for the purchase of land or plots; rather, such financing would be extended for the purchase of land or plot plus actual construction of a house.

The SBP fixed a maximum ceiling of 50 per cent of housing loan for the purchase of land or plot, and the remaining amount for construction. The lending bank or DFI was supposed to obtain a construction schedule from the borrower before the disbursement of the loan for the purchase of land, in instalments.

This was a correct decision but that was too late as the speculators were already successful in holding the prices up. But the high prices minimised the sale and purchase of land or plots for construction.

What went wrong with lending policies for the housing sector? Apparently, the speculators were proved to be the real beneficiaries of the loans. They exploited the rising market demand for housing and were in league with the land mafia which has strong grip over lands in all the major cities and extract the maximum benefit from the situation.

The housing was also on the top of agenda during the governments of Benazir Bhutto and Nawaz Sharif but they failed to deliver. Hence a new housing policy was approved by the present government on December 5, 2001.

As the high prices became unaffordable for many, transactions for land and plots fell sharply. However, the banks came to the rescue of the buyers.

Although it was claimed that the price hike in the real estate was confined to only major cities like Karachi, Islamabad, Lahore, Peshawar and Quetta, the fact remains that price spiral had hit the entire country, but more particularly its major cities.

The policy sketches out the role of the government in the wake of serious shortage of housing units as the growth of home building was far behind the need of a growing population. Second, it was realised that the middle and lower middle class should be able to find a shelter through the low cost housing projects and easy money from the banks would help them to buy it.

But the housing policy moved entirely in different directions. Now prices have gone beyond the reach of the middle class while the lower middle class cannot even think of having a house at the current prices of land and cost of construction.

Some foreign companies have also started building luxurious apartments which remain beyond the purchasing power of 95 per cent people.

Property business has undergone a big change following the announcement of the housing policy and the State Bank’s decision to allow banks to provide loans for buying land and plots, repayable within a period of 25 years.

The present situation has created enormous potential for banks also and some big European banking giants are looking for an opening in the county while others have expanded their operations by acquiring local banks.

The housing schemes being launched by the private companies also arrange loans. But land prices are unaffordable for many.

The price at Taiser Town-a project of Malir Development Authority- is between Rs2500-3000 per sq yard. The scheme is located some 20 km from the tail-end of Karachi. A plot holder of 240 yards has to pay Rs200,000 per year which means he has to save around Rs16,500 per month. For a plot of 400 sq yard, the annual payment is Rs400,000 which means the buyer has to save around Rs33,300 per month.

In order to meet the backlog and shortfall of the housing units in the next 20 years, the overall production requires building more than 570,000 housing units annually. Is it possible with the current level of land prices?

A look at the real estate in Karachi indicates the changing the land prices during the past four years: