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Building housing was one of the main pillars of PTI's 100-day agenda. This push was earlier seen in previous two governments (PMLN's and PPP's) but which died down in the respective regimes' very first year. The efforts were fizzling out during the current PTI's regime, but PM was adamant. He now found his opportunity to wrap it up under COVID-19 crisis and get the nod of the IMF. The housing package offered last week in fact, was rejected by the IMF only in Feb-20. Now, under the doctrine of necessity for generating employment and uplifting economic growth, the package is finally approved.
The salient features of this package are mainly dealing with the supply side of housing. But without adequate demand, this can result in ghettos and ghost houses. In China, some estimates suggest that there are 50 million ghost houses. This problem was also faced by western economies (mainly the US) back in days. For this to not happen in Pakistan, buyer's affordability (demand side) has to be addressed.
What is in offing is primarily for builders and developers, and especially an amnesty for those who do not have white money to deploy in businesses. This part is good. It's better than plain vanilla amnesty schemes. The realtor can whiten its income 10 times of the fixed tax to be deposited, irrespective of the income generated on the project. The actual tax could be less and that will allow income from here and there to be whitened. Let's see how this fares against country's commitment to the FATF.
The question is: will this help bridge the housing gap? On the onset, many builders and developers will avail this to start the projects before Dec 2020 to get amnesty. This will generate an economic push, but how real this could be would depend on other factors that are deterring housing to reach its potential.
Many supply-side issues are in provincial domain. It's likely that taxation and valuation tables are to be rationalized. Lower taxes in percentage and valuation closer to real value are good for documentation. It has been said to reduce the approval time to 45 days. Currently, it takes 6-18 months depending upon localities and height of buildings. Commercial viability of builder is to improve significantly, if the time is reduced. This is to bring efficiency in the market. Having said that, there are complexities in attaining no objection certificates (NOCs), and that is yet to be seen how effectively the time of approvals can be reduced.
Another big problem is the mistrust between builder and buyers (consumers). The usual model is that projects are financed on consumer advances. Builders try to minimize risk by taking out equity in early stages of projects. The risk is skewed towards investors (buyers) and if the project fails there is no mechanism for buyers to get the money back. This can be addressed by having a custodian in between. This can be ensured by proper bank guarantees mechanism.
A swift regulatory regime is imperative for this. RERA (Real Estate Regulatory Authority) should be formed and to ensure buyers protection and to ensure zoning and other laws implementation in letter and spirit. Haphazard development could have its own implication. A Construction Industrial Development Board is to be formed which will give construction an industry's status. Let's see how this board will be able to bring discipline to developers. At this moment, most developers do not even have proper maintenance of financial accounts.
Assuming all the supply-side issues pertaining to regulations, approvals and taxation in provincial domain are dealt with, the issue of demand is yet to be resolved. This cannot be done in the absence of a vibrant mortgage financing. Rs30 billion has been allocated in the form of interest subsidy for low-cost housing. It is not clear whether this is for builders or buyers. If it is for buyers, the consumers of low cost housing are usually not bankable. In a previous regime, Dar kept Rs4.5 billion budgeted for interest subsidy for low-cost housing, but no bank availed it and the subsidy expired without use.
Housing loans are long term. Banks think beyond the current regime to offer new loans. The question is how long will this subsidy last? What if the next government withdraws this subsidy? Is the central bank on board on this subsidy? How will this subsidy be rolled out? A better way to do what India did by having targeted loans in preferred sectors. In India, banks have to give 10 percent of credit in housing. In Pakistan, it's not even one percent. The other way to approach is to reduce the risks of banks by offering first lost guarantee mechanism within this subsided amount. This will entice banks to offer housing loans and for consumers the cost of borrowing (risk premium) is to reduce.
The other issue banks have is in relation to foreclosure laws. There is a recent ruling of Lahore High Court through which banks are not required to obtain a decree in selling mortgage properties to recover defaulted loans. This may save some time of the banks, but still there would be some hiccups in the process such as in today's capacity of banking courts it takes 2-4 years to prove that a defaulter has actually taken loan from the bank.
It is likely banks may need more steps from the regulator (SBP) and comfort of courts before delving into mortgage financing. Without that happening, demand of low cost housing can be filled through a vibrant rental market. But laws are in favor of tenants. There is no mention of rental market in the package.
In a nutshell, the construction package is a first real step towards housing. Once it starts rolling, teething issues may get resolved. It goes without saying that this is an employment intensive sector and it has a spillover on dozens of other industries. Having said that, the housing gap is huge and more interventions are needed to plug the supply-demand gap.

Copyright Business Recorder, 2020

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar

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