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TEXT: For years, Pakistan has had a persistent and mounting backlog of housing stock as supply could not keep pace with the fast growing population in need of formal housing. Evidence suggests that the current stock disproportionately targets high income segments of the population that can absorb the rising prices of properties and buy with ready cash. This system has invariably left a huge portion of the population out of the market. At the very outset, the PTI government decided to put housing at the epicenter of its economic agenda for the country and since, a host of efforts have been made to ultimately achieve a mammoth supply of 5 million houses in the country.

Certainly, the road to the 5 million target is one paved with thorns as the subject of such a large number of housing supply has never gained policy traction from subsequent governments particularly from the perspective of removing market bottlenecks. Most housing plans in the past have concentrated on building housing schemes. But through a series of policy interventions, the housing market in Pakistan is now being slowly developed and strengthened, pushed forth by the Naya Pakistan Housing Program (NPHP).

At the heart of making a housing program successful is the need to make housing more affordable and provide access to financing (often with subsidies) to the target audience. After all, if the goal for the government is to provide housing to low and middle income households, facilitating more affordable financing would have to be inevitable as few of these households can afford to buy property on cash. But even before doing that, housing finance providers needed the right push.

Historically, banks have remained distant from housing and mortgage finance owing to the high credit risk associated to this particular segment. Home loans in Pakistan, in fact, are typically only offered to people with existing relationships and long-standing credit history with the bank backed with real estate properties that could serve as adequate collateral. But while adequate collateral (where land titles are clean) is important, even more important is the enforcement of foreclosure laws in the country—i.e. the ability of the bank to foreclose on a mortgage property (and resell it) in case the borrower defaults.

Thus, it became crucial to a) implement foreclosure laws b) ensure land titles are clear. The exercsie to digitze land records has been ongoing for a couple of years in Sindh and Punjab which is slowly removing information gaps about land transactions. This is providing banks and mortgage providers the confidence to charge their loans against these land and properties, and thus reducing loss potential for banks on mortgages. Meanwhile, the SBP has also worked on upholding existing foreclosure loans in order to give banks creditors’ rights. Credit registeries have also been built that will provide reliable information about new borrowers. Lastly, to ensure that banks do not face an asset-liability mismatch (banks’ liabilities can be withdrawn in the short term while its mortgage loan assets are long-term), the Pakistan Mortgage Refinance Company was established to extend loan-term funding to banks.

These institutional reforms are thus forming a backbone for the housing finance market to thrive on. But as banks become more receptive-given also SBP’s strong signalling for banks to increase housing finance portoflios through target lending - the demand-side also needed addressing. The SBP announced a subsdizied tier-ed mark-up scheme called “Mera Pakistan Mera Ghar” which is available to new home buyers with products being offered by banks/DFIs and most recently microfinance banks.

For projects that are being developed by Naya Pakistan Housing Development Authority (NAPHDA), home buyers can buy properties of up to Rs 3.5 million with maximum financing of Rs2.7 million at 3-5 percent interest rates i.e. for the first five years, the home owner pays 3 percent which goes to 5 percent for the next five years. If the loan tenor exceeds 10 years, the home buyer will have to pay market price (kibor+ bank’s premium rate) for those extra years. Under this particular tier, the home buyer would pay a maximum ~Rs17,000 per month for the first 10 years of the mark-up scheme (see graph).

Evidently, lower the loan amount, lower the monthly installment that the household will have to pay under the scheme. If we use the global measure of affordability that proclaims housing to be affordable if an individual is paying no more than 30 percent of his monthly income toward a mortgage payment, a household earning Rs30,000 can easily afford to get a loan of Rs1.5 million and will only have to pay about Rs8,000-9,500 during the first 10 years. As such, if households can arrange higher down-payments towards their loans which can come from savings, inheritance and family/friends borrowing, they can significantly reduce their monthly burden and thus, many more lower to middle income households can utilize this scheme which by far is more affordable than any home built entirely on savings.

Tier 2 and Tier 3 are for projects that are being developed by private sector developers or for the construction of self-owned properties. While there is no limit to property price under this scheme, the financing amount cannot exceed Rs 6 million and Rs 10 million for Tier 2 and Tier 3 respectively. However, these properties do have size restrictions such that Tier 2 buyers can only mortgage properties upto 5 marlas (or 1250 sq ft) and Tier 3 buyers up to 10 marlas (or 2000 sq ft.). While there are no income restrictions, the size and loan amount limits do ensure that the scheme is not being mis-used. In addition, a new tier Tier 0 has been added which can be offered by microfinance banks with loans of upto Rs 2 million. This can faciliate the ideal target audience of microfinance providers in the lower-income stratas including rural households or slum households. The SBP has created a nifty online e-tracking system to expedite application processes and has devised a mechanism to monitor 30 days Turn Around Time (TAT) for bank application decisions. This minimizes delayed processing and long, meandering turnaround times which can cause backlogs and bring in effeciency to loan decisions and disbursals. Meanwhile, by providing a unique tracking number for each housing finance application, the entire process has been centralized. It is clear that by the end of the PTI government’s tenor, only some of the 5 million houses will actually be built and inhabited. But while the target may be too ambitious to meet, the NPHP may provide the much-needed momentum in the housing market which ultimately, will let the market take the mantle forward, which is how it should be.

Copyright Business Recorder, 2021