THE State Bank has said that housing and construction finance has increased by 75pc to Rs259bn during the last fiscal compared to the previous year. The bank says that 97pc of the overall target set last year has been met, and has termed the growth as unprecedented in the nation’s history. That may be true. But is the increase good enough for improving home ownership? With the government’s interest rate subsidy programme that allows first-time home buyers to purchase mortgages at 3pc, 5pc and 7pc, and the State Bank’s instructions to banks to boost their construction and housing finance to 5pc of their total private-sector loans by December, consumer financing for house building has increased by Rs18bn to a paltry Rs97.8bn in the first 11 months of the fiscal to May. Such subdued growth numbers underscore both supply and demand side constraints on expansion in the mortgage market.

On the supply side, it is commonly known that mortgages are a new area for commercial banks that are also reluctant to entertain loan seekers with a poor, or with no, payment history, or with inadequate finances and income levels unless foreclosure laws are toughened to allow them to repossess the property of defaulters without the judiciary’s intervention. Then, there also is a massive supply gap of affordable housing for low-middle-income, first-time buyers. On the demand side, the majority of those wanting to build or buy a house do not have access to banking services. Or their saving capacity is too low to allow them to look for mortgage. Those who have financial resources either operate in the informal economy or prefer not to obtain bank loans to buy a house. Housing needs, especially in the urban and peri-urban areas, are increasing rapidly and require very large volumes of investment if demand is to be met and the backlog of an estimated 10m units covered. The State Bank claims it is trying to tackle the issues hampering faster growth in housing loans, especially for the low-middle-income segments, but there’s little hope of a major breakthrough in the near term. In a market where banks prefer to invest in secure government debt or do business with large corporations with deep pockets, they are unlikely to expose themselves to new risks. One way of boosting the country’s mortgage market would be to encourage the establishment of specialised housing finance companies and disbursing subsidised housing credit to people through them.

Published in Dawn, July 17th, 2021