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Unaddressed housing backlog

June 17, 2012

THE rising cement sales, media advertisements and high-rise buildings coming up in different parts of Karachi indicate that construction industry is doing a thriving business.

But if one talks to builders, they paint a gloomy picture of the industry hit by rising input costs, and starved of credit and public utilities. They complain that the industry is growing much below its potential and importance in the economy.

While quite a significant part of investment comes from visiting overseas workers or their remittances, the domestic environment for housing development, they lament, leaves much to be desired.

Every year, especially on the occasion of religious festivals like the two Eids, builders launch some 20-25 new projects of multi-storey buildings when the overseas Pakistanis visit their homeland and seek opportunity to invest their earnings in property. A part of the sharp-rising home remittances seeks new investment avenues including real estate.

Depending on their location, many of these projects are fast coming up. In many localities, a number of people are also seen renovating their houses besides going for vertical expansion either because of increase in their family members or for putting an additional floor on rent. All these indicate that there is a huge demand for houses and flats for the rising population.

The construction activities are taking place in an uncertain economic and political environment amid rising cases of extortion, kidnapping of businessmen, land grabbing and terrorism.

In view of the rising local demand, the cement makers have jacked up price of a 50kg cement bag at least four times (Rs32.50) since January this year. The price per bag of cement, which was Rs270 in 2010 rose to Rs365 in July 2011 and to Rs410 in September 2011. Now a good quality cement bag is available at Rs435 to Rs445.

While it is difficult to quantify the share of cement used in public sector development projects, the countrywide cement sales in July-May rose to 21.64 million tons from 19.97 million tons in the same period last year despite frequent increase in prices.

In contrast to rising cement sales, the figures for construction-related large scale manufacturing (LSM) give a different picture.

For example, plywood production dropped by 25.4 per cent or 27.789 million square feet in July-March this year from 37,282,000 square feet in the same period last year. However, production of chipboard rose to 21,784 tons as compared to 20,240 tons last year.

Production figures of two different categories of paints and varnishes show that one of them dropped to 15,961 tons from 19,159 tons while the other plunged to 28.36 million litres from 37.362 million litres respectively in July-March as compared to their production in the same period last year. However, output of glass plates and sheets rose to 10.5 million square meters from 10.15 million sq meters last year.

The figures of LSM may not present a compact picture as a large number of small paint makers are operating in the informal sector besides imported paints are also available in the market. Imported plywood is also on sale in the market. The sale figures of imported items are hard to find out.

It is also difficult to give the exact sales figure of sanitary fittings, tiles, marbles, glasses, aluminum windows and iron grills as many of these items are being imported in sizable quantities besides being manufactured in the unorganised sector. Besides, sanitary items of medium price range also come from Punjab.

Saleem Kassim Patel, Chairman, Southern Region, Association of Builders and Developers (ABAD), does not agree that rise in cement sales represents increase in construction activities.

Cement sales usually gain momentum on rising construction activities ahead of the end of fiscal year when contractors try to complete many public sector projects before the announcement of new budget. From February to August cement sales usually remain brisk, he says. Patel laments that construction activity is not picking up according to its required potential owing to various reasons.

The current per capita consumption of cement in the country is 131 kg, which is the lowest in the region. In Malaysia it is 530 kg, in China 625 kg, and the world average per capita consumption is 270 kg. Meanwhile, the average per capita consumption of steel in the country is less than 37 kg, much less than the global average of 200 kg.

Patel said the main problem is the rising cost of steel in the world market. It is imported and any price fluctuation affects the cost of housing units and their demand moves in the opposite direction. Increase in the prices of glass, paints, sanitary wares, tiles and electrical fittings have also escalated the cost of construction. The falling value of local currency too has added to the woes of the builders.

The real estate sector is already paying Capital Value Tax at the stage of transfer of landed property to the Sindh government.

All other taxes add up to more than seven per cent of the property value.

Patel believes that there is acute housing shortage touching 8.8 million-mark in the country. The government has to take immediate steps to clear the backlog by increasing the housing finance and cut in taxes. If common man is deprived of affordable housing, it will add to the mushroom growth of kutchi abadies, he warns.

A study carried out by utility agencies in Karachi reveals that in a population of over 20 million people, only 1.2 million have utility connections. If one takes the formula of seven persons per house it means that only 8.4 million people are living in housing units with postal addresses. The rest are living in slums, Patel says.

Construction is a big global business with $7.5 trillion output, employing 100 million people. It contributes 13.5 per cent of world GDP. In Pakistan with its share just 2.5 per cent share in GDP, the industry employs 12 million people..

Housing finance to GDP ratio is one per cent whereas in Europe and America it is around 80 per cent. The mortgage to GDP ratio in India and China are seven per cent and 12 per cent respectively. Buyers need to be supported by providing finance for housing at subsidised interest rates to ease the acute housing problem.