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What determines success of a housing finance subsidy scheme? A lot of time has been spent in this space lamenting the lack of adequate data on housing and construction—whether the source is FBR, SBP or any other government agency—in order for the market to properly evaluate the progress of the construction amnesty and the Naya Pakistan Housing Program (NPHP) under which Mera Pakistan Mera Ghar (MPMG) is a mark-up housing finance scheme for NPHP projects (read: “Housing Finance: data nostalgia”). Many have been quick to laud government’s stately efforts, citing the increase in housing finance and financing disbursements under MPMG as conclusive evidence of success. The important question to ask is, what constitutes success.

A detailed impact assessment study using experimental and non-experimental techniques is beyond the scope of this piece, but one strong determinant of success should certainly be additionality. As in, did housing finance grow beyond its usual growth patterns or baseline? Data shows, by Dec-21, cumulatively, banks have approved a total of roughly Rs117 billion under the MPMG; of which, Rs38 billion have been disbursed already. The net monthly approval amount has increased from Rs2 billion in Jan-21 to nearly Rs18 billion in Dec-21. This represents the total number of loans approved in each month by all banks offering the product. If one were to plot the graph for MPMG loan approvals and disbursements, it’s a steep upward-looking graph, certainly demonstrating growth.

For the purpose of this quick assessment, it was better to use net credit data, instead of total outstanding to show incremental credit. Data shows evidently that since the launch of MPMG, housing finance has grown, and almost exclusively grown within the scheme. Banks have diverted all their focus into doling out loans within the scheme giving out very few mortgages otherwise. This is not coincidental. The SBP has mandated banks to increase their exposure in construction and housing finance to at least 5 percent of total private sector loans. At the moment, this share is holding at 4 percent but efforts to increase financing in these areas are certainly ongoing. The first conclusion here is that, nearly all the housing finance loans being given out are now under MPMG.

The more important data point that supports additionality is that net housing finance is at its historic peak right now. Dating back June-2006 which is the oldest data made available by SBP, net housing finance has never been even close to Rs 8 billion which is where it stands in Nov-21. Of the Rs 8 billion by the way, Rs 6.5 billion were net disbursement under MPMG in that month. The previous peak happened in Aug-18 when net housing credit reached Rs 4 billion. So certainly, there has been growth in housing finance and most of it can be associated to the mark-up subsidy scheme. Banks have never given as many loans in housing before.

Having said that, banks have been expanding consumer loans in general. Housing finance as a share of all consumer financing has been growing but not crossing any previous highs. In Jun-19, credit under housing stood at 17 percent, falling to 14 percent in later months but getting back at 17 percent by Nov-21. If housing loans are growing, so is other credit. During the same period, Jun-19 to Nov-21, auto loans as a share of consumer financing has increased from 39 percent to 44 percent. But this indicator does not negate the earlier growth claim.

The other measure of additionality would be the increase in number of new borrowers. While SBP has not published any associated information on the characteristics of the current MPMG loans such as: number of borrowers, average loan size by tier (see scheme rules below), or average loan-to-value ratio, after running a quick sensitivity analysis, we can estimate that the scheme could have bought anywhere between 10,000 and 50,000 new home loan borrowers to the formal credit market (see infographic). Unfortunately, that is the extent to which we can postulate. Even though SBP has given supposed targets to banks on the number of new housing units they should be financing, that key information is also not available. That this mark-up subsidy is targeting low-income or middle-class households is almost entirely impossible to ascertain.

Recall the scheme rules. There are two kinds of projects: NAPHDA (Tier 1) and non-NAPHDA (Tier 2 and 3). Under Non-NAPHDA projects (not run by state authority), there is no cap on property values, only on loan amounts. Under Tier 2 and Tier 3 for Non-NAPHDA projects, the maximum financing allowed is Rs 6 million and Rs 10 million respectively. There is a cap on the size of the units such as Tier 2 can be a property of up to 5 marla (1250 sq ft) and up to 10 Marla (2000 sq ft) for Tier 3, which does limit the borrower to an extent but does not guarantee that the subsidy borrower will be “deserving”. Though, that may be an unfair use of word since the government hasn’t specified who is deserving and who is not. In fact, there doesn’t seem to be any specific target demographic for this government subsidy, even if the PM and the government have marketed and positioned the NPHP as a housing scheme for middle and low-income households as that is where the shortage of housing is.

As is visible on the ground as well, most low-income or affordable housing projects are being undertaken by state or provincial government development authorities. For NAPHDA projects, property value is capped at Rs3.5 million and a maximum of Rs2.7 million can be borrowed against it under the scheme. If most mortgages given out by banks are under NAPHDA, then perhaps, one can assume that a greater portion of low or middle-income home buyers are availing this subsidy. This is the only tier where the property value is capped and thus, ensures that the facility is utilized by a household that may belong to a middle-income group. At the end however, due to limited data available, there is nothing conclusive to add here except that if the scheme has added anywhere between 10K to 50K more borrowers to home finance category, that’s definitely in excess of the usual trend in the housing finance category. But who are these borrowers—we don’t know!

For the record, there is no way to ensure that these mortgages are actually new housing stock being added to existing formal housing. Many projects approved under the construction amnesty were in fact already under-construction. Similarly, rising home loan borrowers does not automatically guarantee new housing.

Also consider this: if almost all the new housing loans being offered by banks are under MPMG, it only confirms that banks have been motivated temporarily to increase housing finance exposure. Will this trend last once the subsidy dries up? The mortgage market cannot develop if the subsidy is the only reason for the growth in mortgages. The question to ask is, has the scheme enabled banks to improve their credit evaluation methodologies and adopt alternative techniques to assess credit worthiness? Has the scheme pushed them to cater to the under-served low-income and middle-income households that typically are excluded from bank financing? Under SBP instructions, all banks and DFIs were advised to “develop and deploy income estimation models/proxy models for assessment of income and repayment capacity” of informal income borrowers. If banks are indeed adopting alternative models to asses the informal sector and bring them into the ambit of formal banking, that would be a win.

Additionality is supposed to be lasting. Has the scheme had a lasting impact on the housing finance domain, and how banks look at home loan borrowers? Once the repayment cycle begins, another crucial indicator to look at would be the default rate and how well MPMG loans have performed with the subsidy compared to housing finance infection in the past. Alas, all of this, only time (and more data) will tell. For now, there is growth, but with a question mark.

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