If we go by the statements of our economic managers, we are on the prosperous road to a ‘free market economy.’ The most ‘booming sectors’ in our economy are real estate and the stock market! But what is of the greatest concern is the deteriorating ratio between the prices of real estate and the wages, as well as return on investment in small business. The government has not only to investigate the causes of this phenomenon, which is symptomatic of deep malaise, but also to come out with some kind of solution to curb speculative increase in property prices.
Uncontrolled prices are a real hamper to economic development and a burden on the economy. How, one may wonder what can the government do to control the situation? Such runaway prices either come about when there is great prosperity, with incomes steeply rising, as happened in some oil producing countries during the oil boom, or when there is intense speculation and money circulates in a small segment of the population. Often, inadequate opportunities for productive economic pursuits create such a situation and/or entrepreneurship is in short supply.
The current situation is that those who need housing do not have the means to catch up with spiralling prices and those who have money, often derived from sale of real estate itself, do not need housing. The common man is caught in a vicious trap, largely as a result of speculation. There is a dearth of genuine buyers in the market. The government’s contribution to the situation through its policies cannot be ignored either.
The speculation can be explained by the following: * The government has not injected land into the market for the last many years and the measures taken have been half-hearted. * Grant of loans by banks at low rate of interest for purchase of land. As everyone knows, loans from commercial banks are open to the influential, who have misused these loans for speculation in real estate and stocks. * Inability of the government to ensure compliance with the conditions of allotment in new schemes, that often require that the applicant be someone without a plot of his own or in the name of his dependents. * Gain tax has been done away with, but across the board sales tax imposed on numerous items of construction input. * Housing loan policies that favour the rich. * Permission to banks to grant loans for purchase of land. * Some people with remittances from overseas compatriots, are in the market for purchase of property. But when we consider that land in posh areas of Karachi, Lahore and Islamabad is costlier than even ,say, in some US and Canadian cities, and obtaining loan by a genuine house builder even more difficult, we can well visualize where we are going. * Black money goes into purchase of real estate assets and stocks. Speculators make hay because there are few taxes or checks on such transactions.
The adverse impact is: * The development of a rentier class, which is often rich but idle, and increase in the number of speculators whose job is to create panic in the market and try to push the prices up. * The inability of small and medium businesses to take off, as a large chunk of the income goes in paying rent and is transferred to the rentier class, * Decrease in savings of the vast majority, resulting in a reduction of aggregate demand, further pushing economic activity down. * Increasing the rich- poor gap.
Another common observation is that a large number of (commercial) shops and offices and a lesser number of apartments in many localities are lying vacant. The reason is either lack of essentials like water and power, or where completion has already taken place, the property-owners demand of unrealistically high rents. Many of them are simply speculators waiting for prices to be pushed up so they can make a quick buck.
The result is that these assets remain unsold, locked and unused and are effectively lost to the economy. This amounts in a way to hoarding property. They fail to bring it in ‘circulation’ so that an economic use is made of this asset to benefit the economy and the community. When contacted, the rationale given by most estate agents for such action (or inaction) was that these owners are not ‘needy’ and “can afford to keep their property vacant and locked!”
In creating artificial demands and escalating prices, the estate agents themselves play the role of catalysts, and often act as speculators.
Just by way of example, the escalation of the prices of real estate during the last one-year alone is astonishing. In several societies of Karachi Scheme No. 33, prices have registered a 200-300 per cent increase in the last one year alone. In the posh areas of the city, prices have gone up by almost 100-150 per cent in the same period.
If one analyses deeply, the mushrooming of additional Kutchi Abadis in the Quaid’s city on prime government land is linked to this runway escalation of prices of lands and housing. Those responsible for this situation are contributing to the malaise through massive malpractices that come to light from time to time. People, who have had to deal with concerned government agencies, are full of stories about these malpractices.
Just the other day there was a letter in a newspaper in which the writer says he had to pay Rs40,000 to get an NOC from a government agency that he should have gotten free! He claims that if any one does not believe in what he says, he can simply go to the Civic Centre, and ask any agent or official. The going rate for a file approved by the KBCA is “five per cent of the value for each file approved.”
The demand of housing is much more than the supply, and the cost of construction is escalating fast indeed, to which government contribution is not insignificant.
The government has also contributed to the malaise by increasing the prices of utilities to a high level. In fact its policy of privatizing the power sector is resulting in sharp increase in electricity rate and yet the problems of shortage of power and frequent breakdowns remains. In new housing societies, connections can only be obtained at a very high initial cost.
Housing, one of the basic needs of people, is intimately linked with the socio-economic and political development of society. As urbanization grows, the problem of urban housing becomes more acute and prices grow. However, there ought to be a check on this increase and some sanity has to be brought to the ratio between wages and prices of housing, specially in big cities. In most big cities, a substantial percentage of population lives in what are known as Kutchi Abadis, partly because many people lack the resources to build or buy a dwelling.
Unless the issue is tackled fast, there would be trouble ahead for both individuals and the government, which is responsible for providing the necessary infrastructure as well as maintaining law and order. Overcrowded slums with unsatisfactory sanitation, water supply, and electricity and public transport facilities act as breeding grounds for disease and crime.
New government sponsored housing schemes are needed to inject land into the market and thus take some of the heat out of real estate market. Re-imposition of gain tax may also be considered.
There is thus the need to create self-contained areas around the city to house the expanding population.