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Pakistan’s once-booming real estate sector is facing a crisis, with declining home values and skyrocketing interest rates.

This downturn threatens not only individual homeowners but has wide-reaching consequences for the country’s economy. These dynamics disproportionately impact the middle-income groups, resulting in a slower market and lower property transactions.

Concurrently, the country’s mortgage sector, integral to housing finance, lags far behind its potential, especially when compared to similar emerging economies.

Hindered by limited access to housing finance, high interest rates, and a convoluted legal framework, the sector’s growth is stymied. This situation is worsened by a general lack of understanding of mortgage products, a rigid regulatory environment, and a dearth of financial products catering to varied income groups.

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The resultant low mortgage-to-GDP ratio in Pakistan not only mirrors the sector’s underdevelopment but also underscores a missed opportunity in fostering economic growth and offering affordable housing.

Pakistan’s construction sector, contributing over 2.5% to the GDP, is integral to the economy with links to over 200 industries.

The real estate sector, valued at $1 trillion, is a significant economic performer and key to addressing the housing crisis. The construction sector’s strong backward and forward linkages indicate its substantial influence on both supplier and dependent industries.

Despite debates over the exact housing shortage in Pakistan, the economic impact of the housing sector is undeniable. It’s a major employment driver and influential in overall economic development.

The government’s focus on urban construction has broad implications, underscoring the need for a balanced approach that considers potential overestimations in housing needs while harnessing the sector’s economic benefits. This approach should blend new construction with improving existing housing and involve strategic urban planning and policymaking.

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In Pakistan’s construction sector, the outstanding loan amount totals Rs201 billion, primarily divided between short-term working capital (Rs35 billion) and long-term fixed investment loans (Rs165 billion). Building construction is the largest segment, with Rs147 billion in loans, almost evenly split between residential and non-residential constructions.

Within the realm of private sector business loans in Pakistan, the construction sector represents only 3% of the total share. Within this sector, loans are primarily distributed between residential (37%) and non-residential (50%) segments. Civil engineering, which includes significant projects like roads and railways, accounts for just 1% of the total loans.

Pakistan’s labor force comprises 72 million individuals, with the construction sector playing a key role as a major employment provider. This sector accounts for 9.5% of total employment, equivalent to 6.8 million workers, emphasizing its significance in the nation’s economic activity and development.

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Notably, the construction sector constitutes 19% of all informal sector employment. Its flexible, labor-intensive nature and less formal job structures make it attractive to workers. The rise in informal employment within this sector mirrors broader economic trends, showcasing the sector’s capacity to absorb labor, especially during economic downturns.

Despite its significant importance, the real estate sector remains far behind in competing with its Asian peers. The mortgage market in Pakistan is notably smaller than those in other Asian countries, as seen in its consistently low mortgage-to-GDP ratio of under 0.5% for over ten years.

This is in sharp contrast to more mature markets like Malaysia, where the ratio is 44%, and Thailand, at 20%, showing a vast potential for growth.

Pakistan’s mortgage sector faces additional hurdles with its exceptionally high mortgage rates, soaring up to 24%. This figure significantly exceeds the single-digit rates seen in countries like Vietnam, Indonesia, and India, which range around 9-10%. In contrast, more stable economies like Singapore, Japan, and Taiwan benefit from much lower rates, between 2% and 4%.

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The real estate market is currently facing a significant downturn, with property values falling by 15% in the last year, a rate faster than that seen in other Asian cities. Over the past decade, the city Karachi has seen a 4% decrease in property values, whereas Mumbai, in contrast, experienced an 8% increase.

Pakistan’s real estate market is distinguished by its moderate rental yields of 5-6% and approximately 6% in transaction costs.

However, this attractiveness is somewhat diminished by the country’s higher corporate tax rate of 29% and a property tax rate of 5%, which limit the entry of corporate entities and long-term investors into the market.

Nonetheless, Pakistan’s real estate market benefits from competitive rental tax rates. These rates are progressive, starting lower for modest incomes and reaching up to 15% for higher income brackets, which is particularly advantageous for small to mid-level investors.

This progressive tax structure is favorable compared to countries with flat or higher rates in Asia.

In summary, Pakistan’s real estate and mortgage markets offer distinct advantages, such as affordability and moderate rental yields, compared to other Asian countries.

However, it is also confronted with substantial challenges. High mortgage rates, decreasing property values in the context of inflation, and the pressing need for wide-ranging economic and policy reforms are key issues. Effectively addressing these challenges is essential for improving the appeal of Pakistan’s real estate market to both investors and potential homeowners.

Doing so is critical to fully realizing the potential of Pakistan in the competitive arena of Asian real estate markets. Therefore, focused government intervention is crucial to fully harness the sector’s potential benefits.

The article does not necessarily reflect the opinion of Business Recorder or its owners

M Yawar Uz Zaman

The writer has over 12 years of experience in financial & economic research in Pakistan, and is currently working as Head of Research at HBFC


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Tariq Qurashi Mar 06, 2024 09:55am
The construction sector can get the economy moving again- Keynesian economics 101. It has many other industries linked to it and is labor intensive. However it has been deliberately sunk.
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