Making houses in the air

Published August 30, 2021

When the PTI administration came to power in 2018, one of its key promises was the lofty target of building five million homes for the low-income population. The evening news shows got another talking point with pundits deliberating upon how achievable that ambitious number was. To help realise this plan, the State Bank (SBP) was taken onboard which unveiled a markup subsidy — starting at a three per cent rate per annum for the lowest tier — to make borrowing a viable option. Along with it, Rs30 billion outlay was presented in the budget for Naya Pakistan Housing Development Authority.

All this noise led to an interest in housing. According to data shared with Dawn by Zameen.com, the real estate organisation, overall demand for properties from 2018-20 has shot up by 111pc in Islamabad and 103pc in Karachi. While this was obviously across the board, there was a marked spike in search activity for houses and flats.

As per the Zameen data, demand for houses and flats in Karachi jumped 132pc and 122pc over 2018-20, 159pc and 150pc in Islamabad, 135pc and 127pc in Lahore. But what good is this interest and the broader demand-side measures such as cheaper financing and subsidies if there is not enough supply in the market? That’s exactly what the bankers also initially argued when they were pressed to step up loan disbursement. And when the revised circular on markup subsidy was published by the SBP — increasing the maximum limit plus doing away with new construction and cap on house prices, lending picked pace too.

That gap between the market prices and FBR rates means only one thing: an increasing amount of money is being transacted in cash and escaping the tax net, paving way for another possible amnesty in the future

That can be seen from the SBP lending data by borrowers, showing outstanding credit for residential construction financing at Rs47.292 billion as of July, compared to Rs34.118bn in the same month of 2020 and Rs28.812bn in 2019, respectively. However, the latest numbers reveal a noticeable decline from June values, which had shown unbelievable growth on a monthly basis. If we turn to “credit by type of finance”, overall — residential and non-residential — construction finance grew to Rs162.6bn in July, from Rs104bn in the same month last year.

So the banks do seem to be lending. At least more than they used to, even if still below the mandated 5pc targets — where again relaxations have been made such as counting holdings in real estate investment trusts (commercial by textbook definition) towards housing portfolios — but supply was still needed. The public sector could only build so much (which is yet to be done properly in any case) and needed the support of the private stakeholders. Naturally, the construction industry found it a great lobbying opportunity with their sycophantic praises for the government and was soon rewarded with an amnesty scheme, giving yet another clean chit to a sector notorious for tax evasion.

Once the government promised to close its eyes, the builders started listing their upcoming inventory. As per the Federal Board of Revenue’s list (last updated on July 27), 2,100 projects have been registered so far of which city-wise details are available for 2,038. Lahore leads the chart at 429, followed surprisingly by Gujranwala at 428 (could be a technical loophole as 408 of these entries are in the same project address built by GardenSquare Developers and only house number differs). Karachi comes third at 333, Rawalpindi 278 and Islamabad 244. Forget the hypocrisy of giving “NRO” to the corrupt lot for now, at least a new supply is coming online which will not only help drive the engine of growth but also make that lofty housing target more achievable.

Well, not quite. At least as far as low-cost housing is concerned. Of the 2,038 projects with address details available, 170 are in Bahria Town and 231 in DHA — hardly the bustling hubs for the less privileged last I checked. Getting into the specifics of each listing is too comprehensive an exercise but a few Google searches for other areas also show that prices for sub-1,200 sq ft flats are generally around the Rs13 million tag, most likely making them unaffordable even if one goes for the maximum financing of Rs10m under Tier-3, assuming a 20pc equity.

This is for the new construction. The revised circular from the SBP also temporarily — until March 2023 — allows subsidised financing for old houses and flats, thus still theoretically keeping the chance of owning a house alive. Provided that the buyer can manage to pay for an already built property. Thanks to Zameen’s data (which is based on listing price and is the best proxy available), we can see trends. Unfortunately, that doesn’t paint a particularly optimistic picture either. In Karachi, the price of a house has gone up by 35pc and 2-bed flat by 18pc over the 2018-20 period. Similar is the trend for other major cities as per-square-foot rate for apartments in Lahore and Islamabad increased in the range of 44-50pc.

Meanwhile, the official valuation table of properties has stayed the same since 2019 for the cities mentioned in this article. That gap between the market prices and FBR rates means only one thing: an increasing amount of money is being transacted in cash and escaping the tax net, paving way for another possible amnesty in the future. But who cares about that? By then, the ruling party will have achieved the short spurt of economic growth — probably with a low multiplier effect — needed to fend off political pressure. Many of the projects to have come live under the much-hailed scheme would likely be half occupied at best, as anecdotal evidence suggests, while the low-cost income groups will continue to have their houses demolished.

The SBP for its part will keep cherry-picking numbers every time there is an increase in construction finance in absolute terms, with a total disregard for relative changes and even declines. Not to mention that the head in question doesn’t really tell us what share of lending was done under low-cost markup subsidy or amnesty, for example. Neither do we have much data on the capacity of those projects being listed, but as long as the ruling party’s official Twitter account can post a meaningless and lousy infographic, it’s all good.

Published in Dawn, The Business and Finance Weekly, August 30th, 2021

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