Naya Pakistan Housing: Supply-side snags

That the Naya Pakistan Housing Program (NPHP) is a haphazardly put together plan by the PM’s team without any adequate research supporting it is well-acknowledged. That it is not for the low-income and poor populations of the country should also become clear (read more: “Naya Pakistan Housing: The lies we tell”, May 21, 2020). While affordability is at the heart of the current housing crisis, let’s also look at the supply-side of the situation—whether the program would yield enough supply in the market and the questions that ought to be raised now rather than later.

To first review: the PM announced a construction package last month, in part to spur construction industry and create much needed employment and in part to accelerate investment into NPHP. The package has a no-questions-asked policy on investment into real estate development. Taxes have been converted to fixed rates based on square footage, rather than properly value while an additional advantage exists for investments in NPHP where 90 percent of the taxes owed by the developers will be waived off.

Once developers run numbers, they will realize that the fixed tax regime itself is an incentive to build high-end properties, rather than low-cost ones. Since tax depends on size, rather than property price, expensive properties will incur lower tax burden. Though the 90 percent tax waive off is an added bonus for low-income housing, these projects will have to be built on a large scale to truly make them profitable while being low-cost. Builders would prefer to go the easy route of building developments where there is surefire demand, and certain profits. This is another nail in the coffin for NPHP proponents that want to see “affordable” housing being developed.

Secondly, there is a looming question on just how cities will grow from hereon. While PM Imran Khan has repeatedly tweeted about the importance of going vertical, there are no incentives for vertical development at all. In fact, BR Research conversations with various stakeholders suggest that most builders would prefer not to go vertical—they take longer, they are more complicated to build, and they are also more expensive to build.

Sprawls are simply easier to do. In an interview, Urban Planner Nadeem Khurshid told BR Research that housing schemes have very high profit margins—upto 300-400 percent—compared to profits made on building constructions. It makes more commercial sense to move horizontally. If more investments come into horizontal development—particularly in elite urban spaces where density is already low, this would further grow inequities and divide cities along socioeconomic lines.

Those builders who have land already available in city outskirts, especially in Karachi, may be motivated to build high-rise construction since the city is more receptive to vertical development. Here housing may be built on a more affordable payment plan. However, there is a contention on who will develop the infrastructure near and around the outskirts to connect the city to the outskirts. If the builder develops the area, it will add to its costs which would drive up the prices. On the other hand, the government does not seem to have any funds available to build roads and infrastructure in the outskirts which brings the problem back full circle.

Builders and developers frequently complain about the long procedural and approval times they require to initiate project construction. These approval times are now being brought down to 30 days under a one-window operation. This would help project deliveries on time. However, in a scheme where money-whitening is implied, a lot of investment could pour into unsafe constructions where quality and safety is compromised. Neither the NPHP nor the construction package has acknowledged the challenges that come with ensuring buildings are safe. Historically, regulators have allowed construction of high rise buildings that proved to be unsafe. Meanwhile, absence of condominium laws further makes home owners vulnerable and ultimately make cities less livable.

It is clear that the construction package will attract big-buck investors and those with grey money looking to legitimize it without any government oversight. Because of the incentives under the package, it is more likely to attract affluent construction projects. But these projects can only be incremental. Those builders that may bring affordable housing—if not low-cost—will have to confer with the government on its responsibility to provide public utilities and infrastructure. These projects will only be viable if they are done on a large scale which means demand-side risk factors will be higher. It is safe to assume though that incremental projects will get green-lit faster and have niche buyers so they will also easily sell. However, there are neither demand-side (safe for a small subsidy) nor supply-side incentives which would provide supply where demand truly exists- in middle to low income pockets. For that, Pakistan is not yet prepared for.