“SOMETIME back a salaried person came to me wanting to buy a house. But every time he’d save up enough money, property prices would go up. He gave up eventually. Buying a house is just not possible for a middle-class person anymore,” says Tahir, a long-time property consultant.
Real-estate market correction in Pakistan is long overdue. Housing, over the past three decades, has become expensive and increasingly opaque.
Realising perhaps the enormity of the situation, or merely as a symbolic gesture to be taken up by the next government, the PML-Nawaz government in its exceptional final budget attempted to burst the highly-sensitive — considering the oft-touted vested interests in the sector — property bubble.
It introduced three major changes that, if implemented, may change the way the game is played: the concept of the government’s pre-emptive right to buy any property at a fixed rate, demolition of both District Commissioner rates and Federal Board of Revenue (FBR) valuation tables, and the bar on non-income tax filers from investing in property over and above Rs5 million.
Since properties are not documented at their real value in Pakistan, it is difficult to determine the actual worth of the sector, but data from the FBR and industry surveys estimate that the sector is worth around $700 billion (Rs85.4 trillion at the rate of Rs122 to a dollar).
Real-estate market correction in Pakistan is long overdue. Housing, over the past three decades, has become expensive and increasingly opaque
Currently, the dynamics of the property market are wholly dependent on private sector players with little or no government intervention to ensure price stability or affordable housing.
This is evident in renowned economist Dr Hafiz A. Pasha’s latest book, rather aptly titled “Growth and inequality in Pakistan”, which observes that private investment accounts for 70 per cent of total investment in the country; and that almost the entire investment in six sectors, including housing (100pc) and construction (96pc) is by the private sector.
As a result “all the country’s illegal and untaxed money now gets parked in property. We have ended up giving legal protection to illegal money,” states Mr Shabbar Zaidi, a director at the House Building Finance Company Limited (HBFCL) and senior partner at A.F Ferguson and Co.
Mr Zaidi, passionately using the term “parking lot” during our conversation, explains that there are two types of buyers: those who buy residential property and those who buy land as investment. The problem arose owing to the latter category that has the power to buy in bulk — sometimes to cover questionable sources of income — and then sell at an exorbitant profit.
Based on the basic concept of demand and supply, skewed investment and artificial price hikes have led to the creation of a property bubble which means that the rate at which land is sold will quite obviously be hugely inflated.
For an average salaried individual this means that the price of a plot of land will have become too high to invest in. Due to this, according to a project financing document by the World Bank, the estimated housing shortage in Pakistan is up to 10m units, of which about 40pc is in urban areas.
Studies indicate that “the gap continues to widen by roughly 350,000 units per year, as new housing production falls short of the rate of household formation and existing housing units become obsolete.”
The concept of pre-emptive right has been introduced as a means to “pop the bubble”. The government now has the right to buy any property at double the declared price within six months of its sale.
This puts individuals, who do not want their sources of income questioned, at a disadvantage. If they pay Rs150m for a house and declare its value at only Rs20m on paper, when we all know otherwise, the authorities will be able to snoop in and buy it from them at Rs40m.
The government would be paying double but the initial buyer still losses Rs110m. The net result of all these changes will be that people dealing in property will not only be forced to enter the tax net but that property prices will also come down.
Is this a win-win scenario? Not quite. Mr Zaidi puts a damper on my enthusiasm by pointing out that while these changes do come into effect on July 01, 2018 under the Finance Act 2018, they are reliant on the government actually notifying the concerned authorities — which it has not done as yet.
Not to mention that nothing will actually go into effect till the time the provinces likewise don’t replicate the changes; which they don’t seem inclined to do at all. And considering the current political climate Mr Zaidi sympathetically tells me to “forget about it.”
So does that mean the ball has been dropped? “No.” Mr Zaidi states. “It will not be dropped. People need to be aware that this law is right and that it should be there. Even leaders with vested interests respond to social pressure.”
But, there is a fear that the market might experience a “jolt” if the government’s initiatives do get implemented. “So let there be a jolt” is the unanimous answer from all the experts this writer spoke to.
Surprisingly, all counter with a statement to the effect of “while buyers for an incredibly expensive property will decrease, the gap will be met by those investing in more affordable housing. The sector will be compensated through volume.”
Once these changes do come into effect it is important that the central bank work with the financial sector to further encourage housing finance loans to ensure the volume mentioned above.
Pakistani banks, notorious for being risk averse, tend to “put their money in government treasuries to secure it,” says Mr Mazhar Ali Nasir, senior vice president of The Federation of Pakistan Chambers of Commerce and Industry. “They need to develop tools that encourage the middle class to take advantage of loans to invest in housing.”
Those loans that are being given are heavily skewed in favour of individuals on the higher end of the income bracket. The World Bank report states that “mortgage loans are typically extended to the extreme end of the high-income group, that is, the 10th income decile of urban households.”
Published in Dawn, The Business and Finance Weekly, June 19th, 2018