WITHIN bigger-picture debates and discussions on our economy, a prominent thread has emerged and solidified over the past year: that of real estate and property. This topic gained traction after the PML-N government banned certain property transactions for non-filers.
Driven by massive institutional as well as private ‘schemes’, our cities are now sprawling complexes of (often vacant) plots. In the meantime, speculators have benefited from loopholes in our tax laws even as our national housing shortfall has surpassed 10 million units. One thing is important to highlight here: an effectively managed real estate sector can work to solve many of our tax, housing and urban headaches. That it has created more of such problems in Pakistan is a direct result of our own mismanagement, which successive governments have only made worse.
The primary task for any good analysis should be to separate real estate into its main constituent parts: land and buildings. Incidentally, this is also our biggest folly; we continue to treat both land and buildings as one, even when we direly need more of the latter to house our increasingly urban population. An empty plot cannot contribute to housing supply, but a house — or better, a multi-family apartment building — can. This should give us a hint about how we align incentives for the real estate sector.
An effectively managed real estate sector can work to solve many of our tax, housing and urban headaches.
Why is this distinction between plots and housing important? ‘Plots’ are a toxic phenomenon for our cities today. Whether near Kahna in Lahore, or near the new airport in Islamabad, or along the Super Highway in Karachi, one can witness thousands of acres of formerly agricultural or informally held land that is now vacant plots. There is massive underutilisation of land, driven by high demand for plots, due to expectations of future profits. As a result, more plots are developed, increasing sprawl in almost all our cities. For example, think of where Bahria Town is located in Lahore or Karachi, or think about the newest DHA phases relative to CDA sectors in Islamabad.
It is true that, in this process, people who invested in plots profited to the tune of billions. Many people used ill-gotten or untaxed wealth to buy such real estate, and continued to make even more, low- or un-taxed profits on their investments. It is also worth mentioning that vacant land is hardly a productive use of national savings. But it is also true that these plots became the easiest source of safe, good returns for many people of the fabled ‘middle class’.
These people do not possess the clout to set up their own industry, and they cannot suddenly find themselves in advisory positions under autocratic regimes even in their wildest dreams. Banks, the economic interface between such savings and productive capitalists, have always been subject to unhealthy public-sector borrowing and continue to face a hard time with influential capitalists defaulting at will.
The real estate sector, therefore, presents a more nuanced picture than many critics would like to acknowledge. The government has an opportunity to incentivise large-scale additions to the country’s total housing supply, as well as generate employment and economic activity from new construction. The ban on property transactions was a step in the wrong direction. While amends have since been announced, even current steps like revising DC rates, increasing withholding rates, or imposing new capital gains taxes are incomplete at best.
Instead of simply seeing this as a taxation issue, we need to see it as a problem of encouraging the conversion of plots into built housing units in our cities. Two measures stand out in this regard: a vacancy tax and a complete rethink of our building regulations and permits.
A tax on vacancy would be the most important corrective mechanism to add to our housing supply. Such a measure would necessarily have to be localised — each local government can assess its own housing needs and devise a suitable taxation regime. Plots that remain unused after an announced time, or houses (or apartments) that remain unoccupied after a similarly announced time, must be subject to special charges to account for the loss in productivity they create. Local bodies (like the LDA) already look after building permits; they can use the same information to also assess vacancy periods, and then levy appropriate charges to owners of noncompliant lots.
The second measure would entail completely revamping building permits and associated procedures. We must acknowledge that the days of sprawling, single-family bungalows are long gone. Our cities cannot sustain their populations given such trends in housing. Prominent economists and planners have taken great pains to illustrate the idea of high-density, multi-family residential units in cities. However, our regulators have continued to resist them. It is time to encourage apartments and other dense housing units in all our cities, including through tax incentives to developers and private investors.
It is true that our obsolete land record management would make such strategies impossible to implement in most of our cities. However, housing societies — at the heart of our ‘plotonomics’ ills — can serve as useful allies. While patwaris are notorious for land record mismanagement and whatnot, housing societies have an incentive to maintain accurate records to maintain market credibility.
Similarly, renter records (often maintained at area police stations) allow us to evaluate occupancy of built housing units. Therefore, a good first step would be to build a framework for sharing all this data with relevant local governments, and then use that information to start enforcing vacancy taxes as well as encourage additions to the housing stock.
Other steps would be required to make these suggestions work. Things like an efficient mortgage market, regulatory transparency, and enforcement of contract rights must combine with a localised property tax regime to make the most of urban land and the real estate sector. We have to start somewhere, however, and the time to do so was last year. These discussions can continue alongside.
Published in Dawn, July 21st, 2019