Lately, there has been a surge of excitement in the real estate market, particularly in upscale urban areas.
The initial wave of optimism stems from discussions about a potential real estate package and the formation of a task force to address the sector’s challenges. For the past two years, the real estate market has been nearly stagnant, dragging down the construction industry along with it.
Opinions on reviving the sector through fiscal and monetary incentives are deeply divided.
One camp is highly cautious, fearing that a resurgence in real estate could push the country toward a full-blown macroeconomic crisis while reopening channels for black money to flow into the system. They argue that past housing scheme scams could resurface, allowing big tycoons to reap the benefits while leaving ordinary investors stranded.
On the other hand, proponents of real estate revival view it as a key driver of economic growth. They emphasize its ability to generate employment, address critical housing shortages, and sustain 40-50 allied industries. This group advocates for broad incentives to stimulate the sector.
The reality, however, lies somewhere in between. The concerns of skeptics have merit—historically, real estate in Pakistan has served as a haven for the black economy, with fraud and defaults prevalent in a sector dominated by powerful groups, including politicians. Yet, some of the demands from real estate stakeholders are legitimate.
It is important to recognize that housing is not a productive asset in the traditional sense. While it generates employment and economic activity during construction, it does not produce direct economic returns once completed.
Unlike efficiency-driven industries that yield benefits for decades, real estate is not an engine of sustained economic expansion. However, housing is a fundamental social need, and supporting it should not be demonized.
Pakistan’s growing population faces a widening housing supply-demand gap. Mortgage financing remains almost nonexistent, limiting wealth transfer from the affluent to the middle class.
Housing affordability is declining for low- and middle-income groups, making it essential to promote affordable housing solutions.
A key question is what the government should do to address the sector’s challenges. One major reason for the slowdown is the broader economic downturn and declining purchasing power. Like any other industry, real estate will take time to recover.
However, excessively high transaction taxes have further paralyzed the market, with transaction volumes in some areas dropping by more than 90%. No other sector has suffered as severe a slump during the 2022-24 economic crisis.
Currently, overall transaction taxes stand at 10-12%, including withholding income tax on both buyers and sellers, along with a federal excise duty (FED).
While the income tax is adjustable against actual tax liability, it remains a major deterrent to transactions. The FED, in particular, is an unjustified punitive tax that discourages activity.
With market activity dwindling, tax collection from real estate transactions has fallen far below expectations. The resulting slowdown is also stifling construction—especially in the housing sector, which is one of the largest employment generators in urban areas.
A study by Karandaaz has found that constructing 100,000 five-marla (125 sq. yard) houses in a year creates 200,000 direct jobs for masons, carpenters, and plumbers while also benefiting 40-50 allied industries, most of which are SMEs.
Limited construction activity is hampering economic recovery despite recent macroeconomic stabilization. Alongside the struggling farm sector, this stagnation is preventing economic growth from gaining momentum.
It appears that the high taxes imposed on real estate—similar to increased taxes on automobiles and restrictions on consumer financing by the State Bank of Pakistan—were deliberate measures to slow down demand.
While these policies may have been necessary in the short term, they should not become permanent obstacles to growth. Sustainable economic recovery should be the ultimate goal.
The government should begin unwinding these restrictions and allow the sector to grow organically. However, any reforms must focus on documentation and transparency.
Currently, transaction taxes are high because reported property values are only a fraction of their actual worth. Multiple valuation tables exist, none of which reflect real market prices. These discrepancies must be eliminated, and taxes should be rationalized accordingly.
Stronger regulations are also needed to prevent housing society scams, with strict penalties for fraudsters. Real estate transactions should require the same level of documentation and scrutiny as bank or mutual fund accounts, ensuring that the source of funds is verified to create a level playing field.
At the same time, real estate should not be treated as an untouchable sector. Zoning laws need improvement, with a push for higher-density development. Federal and provincial tax policies must be harmonized to create consistency.
The cost of holding undeveloped land should increase through higher property taxes, while constructed buildings should face lower taxation. Additionally, capital gains tax should be enforced, and transaction taxes should be reduced to stimulate market activity.
One potential challenge is securing approval from the International Monetary Fund (IMF). However, if a well-thought-out policy is presented—one that ensures fairness without creating distortions—the IMF is unlikely to object.
The path forward requires a balanced approach: reviving the real estate sector without reigniting past excesses, promoting affordability while ensuring transparency, and stimulating construction without jeopardizing macroeconomic stability. By implementing thoughtful reforms, the government can turn real estate into a structured and sustainable pillar of economic growth.
Copyright Business Recorder, 2025
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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