Housing-for-some!

In latest development, and inevitably, the PM has announced that there will be no taxes collected—including sales and fixed taxes—on the construction activity for Naya Pakistan Housing Program (NPHP). It seems the government is willing to make this sacrifice to the exchequer in hopes to making up for the shortfall somewhere else: the multiplier affect!

According to media reports, over 1.9 million applications have already been received, and the promise is to make 5 million houses which comes up to a mammoth cost of Rs4.5 trillion or about 8.2 percent of Pakistan’s FY22 government-forecast GDP. Or at least, it did when the plan was first conceived.

The issue of cost is at the heart of any housing plan initiated by a government for low-income households. Some governments go into social housing where the entirety of the bill is footed by the government itself. The other approach is going to the market or more commonly known as public-private partnerships where the government facilitates both the developers as well as the recipients to make housing possible.

The facilitation may come in the form of fiscal benefits such as tax reductions, interest rate reductions, cash/direct subsidies, land price subsidies, free or partly paid-up land etc.—wherever and however much the budget allows. It may also come in the form of regulatory and legislative positions to ease the private sector into it.

The challenge of affordability is two-fold: making it commercially viable for the developer and making it affordable for low-income groups who are already living hand-to-mouth. To fulfill the former goal, this government needs to reduce the approval times (which it is working on), facilitate land availability, and ensure urban planning. On the former goal, this government faces a massive challenge.

Home ownership is out of reach for much of the middle class and low-income households in Pakistan who currently occupy rental housing which—depending on the location—is often substandard and poor quality. Mortgages are not as widely available (or affordable), property prices are speculative hence rising every day, while construction costs also rapidly escalate, especially in times of high overall inflation.

Between Aug-18 and Aug-19, Consumer Price Index (CPI) inflation rose 12 percent while price index for construction items rose 14 percent. In fact, by November 2019, CPI was up 15 percent, while prices for construction items grew by 16 percent. Even if we go by Aug-18 to Aug-19 inflation numbers, the total estimated cost for 5 million houses has now grown by Rs630 billion based on the change in per unit cost. Property prices have not stopped growing either.

Commercial banks afford adjustable rate mortgages (ARM) which are also few and far in between. Even at average interest rates, these mortgages are not affordable. The Housing Building Finance Corporation (HBFC) has now introduced a fixed rate mortgage (FRM) at 12 percent for households which is a 20- year tenured first of its kind mortgage product. But calculations suggest that any household earning less than Rs40,000 cannot afford buying a property costing Rs1 million if they utilize this FRM product (read more: “Roti, kapra, (and then maybe) makaan”, July 4, 2019).

Last month, the government announced a subsidy of Rs30 billion for the mega project. It is unclear how this subsidy will be awarded to recipients—whether it is a cash subsidy given to the applicants, or it is an interest-reduction subsidy offered indirectly. It is also unclear how many houses the subsidy would cover but consider the rapid increase in the cost of construction over the past months. A simple calculation suggests that this subsidy cannot even occur the incremental cost of construction for the first year assuming one million houses will be constructed in that year.

The tax reductions together with the subsidy might benefit the beneficiaries by bringing down the total burden but not at a time when disposable incomes are falling and inflation is up. In fact, if incomes don’t increase and cost of necessary goods continue to go up, even those middle-income households which could chip in the monthly installment might be pushed out.

In fact, the question of whether the NPHP can be made affordable for the lowest 40 percent of the population cannot be answered at all. Evidently, there would have to be a massive-scale subsidy to make that happen. The only solution at this point is to increase supply of housing so property prices start to come down, provide home ownership to as many first-time buyers as possible, make mortgages less risky for the financial sector through firm foreclosure laws and keep regulatory controls in check. For now, housing-for-all is not possible. Housing-for-some is the safest best.