Rental inflation

Published July 25, 2021

HOUSE rent prices soared in June by 6.21pc from 4.2pc a year ago, topping the list of 10 contributors to the urban Consumer Price Index during the last month of the previous fiscal. The other major contributors to the urban CPI, according to the monthly Inflation Monitor published by the State Bank, included motor oil, electricity, food, etc. The surging rent prices indicate the increasing gap between housing demand and supply in the cities amid changing family structures and a growing urban population. The trend also reflects the increasing cost of real estate and construction in recent months, affecting the rental housing market in the urban centres as renters demand a higher return on their investments. The increasing rents mean that urban housing is now turning into a major crisis for city dwellers, especially those living and working in places like Karachi and Lahore.

The rising rents have major implications for the broader price inflation since rents are tough to control without more housing. After all, when people don’t own homes they will have to rent a place to live. It is, therefore, safe to assume that housing inflation will keep climbing as the economy picks up and more middle-class families look for rented shelters. According to most estimates, the country is facing a shortage of at least 10m housing units, mostly in the cities. The backlog is increasing by around 350,000-400,000 units per annum. Although the government has announced a slew of generous tax and regulatory incentives for developers and builders besides offering interest rate subsidies to first-time homeowners on bank loans to encourage new investment in housing, the project has been slow to pick up. In spite of the central bank’s instructions, banks are reluctant to lend to most applicants owing to the latter’s lack of payment history or other reasons. To control rent inflation, the government needs to push those who have used the incentives to whiten their illegal money and invest heavily in housing.

Published in Dawn, July 25th, 2021

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