Real estate along with stock exchange, currency markets and commodities are sectors where investors like to invest for short-term gains. While several phases of increase in real estate prices have been witnessed, the surge in the recent past was extraordinary.

In a very short period, the value of houses and plots rose three to fourfold. This happened when there was the excess liquidity with the banks and loans were available at the historically low rates. Some investors diverted loans obtained for export, trade and industry to other areas for quick gains.

It is a common knowledge how the loans obtained under the concessionary Export Finance Scheme were misused by many so-called exporters.

Real estate offered opportunity for speculative investment. Instead of actual plots and houses, people were just exchanging files of the property and earning millions of rupees overnight. Some saw this trend as a real demand and urged the banks to provide more loans to housing sector and introduce various schemes to bridge the gap between demand and supply.

The rising value of property increased the real worth of the people. Banks provided loans against the collateral of these properties not only for the purchase of houses and plots but for other purposes also. In July-December 2006, the 50 per cent increase in total advances to private sector was given against the collateral of real estate.

However, after some time as bank loans became dearer, investors withdrew to the sidelines and prices stopped to increase. After remaining stagnant for some time, as there were no buyers in the market, the prices started to decline. The property prices have reportedly crashed up to 35 per cent in all the major cities.

This decline is more evident in the posh areas such as DHA and Clifton in Karachi where investors had invested most of their money. Due to the crisis in the stock market, many investors are selling their properties just to meet the loss. As estimated by estate agents, only recently 250 plots in DHA Karachi were sold at throwaway prices. This has pushed down the already depressed prices.

Previously, it was the country’s labour that was eager to go to Dubai by any means just to solve its financial problems and now it is the turn of capital. Not only has the technology made this process easier but the host countries are also encouraging capital inflows by amending old and making new laws.

This capital flow to Dubai which is said to be in billions of dollars, has created problems for many sectors and the real estate is one of them. Many are selling their properties just to transfer the money to Dubai to purchase real estate and other assets.

The real estate sector has played an important role in the global financial crisis. The sub-prime mortgage crisis has not only engulfed the US financial system and economy, it has also affected the banks of the developed countries overshadowing all previous crises including the crisis of Japanese banks in 1991, Thai banks in 1994-96 and the East Asian countries crisis of 1997.

The advances by banks extended against the collateral of real estate is substantial. As at end-December-2007, the outstanding amount of such advances was about Rs564 billion--21.6 per cent of the total outstanding advances. Out of this, the advances extended for housing finance were only Rs62 billion or about 11 per cent of the total advances given against the collateral of real estate.

Recent figures show that along with the decline in the overall consumer credit, the growth in the housing finance has also decelerated. The uptrend in housing finance has tapered off in the recent quarters. Apart from this, the ratio of non-performing loans has increased in the case of housing finance as in other categories. This ratio increased from 2.3 per cent in March 2007 of total housing loans to 4.2 per cent in March 2008.

The total housing loans constitute only 2.4 per cent of the total bank advances. The policy makers and bankers are worried about the rising infection ratio in these loans and their impact on the banking system and the overall economy. If the present declining trend in the value of real estate persists, performing loans to total advances would increase, aggravating the brewing crisis of the financial sector.