Socio-political drivers determine the pricing in Pakistan’s real estate industry, worth around $350 billion. The district collector’s (DC) property valuation rates and the State Bank of Pakistan’s interest rates remain a meagre part of the economic literature.
Despite a consequent decrease in real estate prices globally, there is no sign of a decline in property prices in Pakistan. Like many other developing and developed countries, the country is also facing a wave of economic recession. The mounting inflation, low returns, stagnant growth and magnifying unemployment are a few of the worries.
While housing demand is low, property prices are rising, shattering economic principles. Contrarily, supply is created to attract demand at a later stage.
What is special about the realty sector? Here we have to diverge from pure economic analysis to socio-political dynamics. Pakistan’s realty economy is characterised by manipulated business practices, political interventions, social standards, cultural considerations and illogical crescendos.
As plot files exchange hands in the market, prices of property rise without being driven by demand
The volume of emotional buying is considerable in this regard. The end users buy and build houses to safeguard their families. Their buying decisions are backed by their pious emotions for their loved ones. Those who have the power to buy a low-cost house try to manage the budget for an ultramodern, spacious house. It compels them to borrow. This is how we allow our socio-cultural patterns to influence the recurring process of real estate price determination.
Speculation of off-ground plot files does two things — promotion of cash economy and initiation of the complex real estate price determination process. These plot files exchange hands in the market. The realty tycoons set a trap for perpetual price hikes.
Cancellation of oversold files is propelled, and balloting is done. By now, the customer has paid half of the instalments. The prices keep on growing. Nobody cares about the DC property valuation mechanism.
Pakistan’s population is increasing at an annual rate of 2 per cent, which impacts real estate demand and prices. But the insane increase in prices is not commensurate with the actual demand. Therefore, the necessary relationship between population increase and housing demand hardly fits into the case of Pakistan. Instead, investors pay the ‘unreal’ value despite their eroded real incomes.
Let’s take the example of the United Arab Emirates. Under the dark shades of Covid-19, property sales volume in Dubai amounted to $2.4bn in September 2021, which rose to $3.7bn in 2022. In Pakistan, the pandemic turned everything upside down, but property prices either rose or froze. Neither current account deficits nor a decrease in taxes brings the monetary value of real estate down.
Similarly, Perth was the most expensive state in 2007 in terms of prices of houses, apartments and other realty assets. The rental rates were sky-high. The mining slowdown brought these prices lower.
Australia’s Bureau of Resources and Energy Economics reported around 9pc decline in revenues from the export of resources. A large number of coal and iron mine workers lost their jobs, and companies stopped investing. This led to lower real estate prices which rose later.
This is not the case in Pakistan. Here, the worst economic indicators seem to have no power to bring down real estate prices. At times, people do not have savings to invest. The market suffers from low demand, but the prices keep on increasing. Who drives the real estate and construction industry?
The practice of proposing the market value and attracting customers with similar valuations seems to be strategic. However, this practice is no more than the financial exploitation of real estate investors. The setting up of a Pakistan Property Institute could help regularise the real estate sector.
Taking real estate companies and government departments in loop, such an institute could devise a fair mechanism to ensure logical fluctuations in real estate prices. The transactional digitisation of the industry could impart a healthy change.
Most importantly, the rule of law would abolish unfair socio-political interventions in the determination of prices of real estate inventories. Finally, removing unregistered companies from the real estate sector must be considered to prevent them from getting involved with development companies to constitute illogical prices.
The writer is a socioeconomic analyst and founder of Real Estate Research Centre Pakistan. Email: waheedurrehmanbabar@gmail.com
Published in Dawn, The Business and Finance Weekly, October 17th, 2022
