Affordable housing: an uphill virtuous task

THE incentivised Naya Pakistan Housing Project (NPHP) for building 100,000 homes offers both banks and construction industry an opportunity to benefit from the stimulus package with risks in real estate business and housing finance somewhat minimised in these hard times.

The PTI’s flagship housing scheme is a major initiative to shore up labour-intensive construction and allied industries, kick-start the economy, create jobs and provide affordable houses to low- and middle-income groups.

The success of the project depends on the response of the private housing sector and commercial banks as well as current housing demand.

The share in housing finance in Pakistan is a mere 0.2 per cent of the total loan portfolio as compared to 10pc in India and 90pc in Europe. The stated reasons for this are (a)first and foremost the absence of foreclosure laws (b) the want of clear land titles and (c) largely informal activity in the construction industry.

Businesses hold the view that the formalisation of the informal economy is only possible if high tax rates are cut and the stifling investment and business regulatory regime is rationalised

To encourage mortgage financing, the government promulgated an ordinance in July 2019 to remove hurdles in the way of efficient recovery of mortgage-backed security. It was approved by National Assembly in November last year.

An analyst says that the ordinance provides immense protection to the interest of lenders but has stipulations to protect the rights of the borrowers. The commercial banks want apparently a foreclosure law that gives them the right to sell the mortgaged property to recover the bad debt without getting involved in any process which they consider inadvisable.

Also, under the housing package, the risk in banks’ mortgage lending has been reduced by making the housing units ‘affordable’ for buyers.

The government is providing a Rs30 billion subsidy for individual house-builders. Every owner of the first 0.1 million housing units will get Rs0.3m subsidy. Similarly, individual borrowers will be eligible to the subsidised interest rate of 5pc for building a five-marla house and 6pc for a 10-marla unit.

Critics, however, doubt whether households would have enough savings for investment in housing units when joblessness and poverty are on the rise and livelihoods of employees and wage earners remain under threat. Salaries have been reduced or not increased despite the sharp rise in food prices. It is also pointed out that no exercise has been undertaken by the provinces who are supposed to identify housing demand.

The government is trying to encourage the construction and housing sector to enter the formal economy through a tax amnesty valid up to Dec­ember 31. No questions will be asked about the sources of funds invested in the housing sector. Given past experiences, it may lead to some documentation making the industry eligible for housing loans.

So far builders have been generally putting their initial equity while raising funds from instalments paid by buyers to finance and complete housing projects.

Businesses have also held the view that the formalisation of the informal economy is only possible if high tax rates are cut and the stifling investment and business regulatory regime is rationalised. The housing policy is addressing both issues including the quick approval of projects.

The government has abolished 90pc of the tax under section 111 of the Income-Tax Ordinance for NPHP while provincial taxes have been reduced. Besides, the tax regime for the entire construction sector has also been changed to a more industry-convenient fixed rate system.

No doubt the problem of error-free titles of rural land holdings is far from resolved despite marked progress in digitalisation of records. The digitalisation of urban land even for cities like Lahore or Islamabad is in the initial stages. Analysts stress the need for a land bank. The authorities have expressed their determination to solve problems they encounter in the way forward.

The federal government has asked the State Bank of Pakistan (SBP) and commercial banks to raise the share of housing finance from the current 0.2pc to 5pc of their total loan portfolio. It is estimated that Rs330bn would thus be made available for house financing.

However, according to JS Research, the banks are averse to fresh lending despite such measures as space in capital requirements, increase in borrowing limits and extension in regulatory credits announced by the State Bank of Pakistan. The JS report says the overall loan growth remained flat in the last quarter of 2019-20.

Aware of intricate long-term issues, the State Bank Governor Dr Raza Baqir has set up a steering committee to prepare and implement a road map to ensure sustainable market-led financing of housing projects and housing mortgage.

In the first meeting of the steering committee chaired by Dr Baqir, various sub-committees were formed to work in parallel on different work streams including developer finance, end-users housing finance, use of technology, development of the capital market and the long-term yield curve, risk mitigation and removal of legal and regulatory hurdles in housing finance.

Governor Baqir also made it clear to the committee members that housing finance was a priority area for the central bank. The committee includes presidents of selected scheduled banks, Deputy SBP Governor Jameel Ahmed and Naya Pakistan Housing Development Authority Chairman Lt Gen (rtd) Anwar Ali Haider.

Looking at the bigger picture, the prime minister’s think tank in its meeting held on July 11 discussed measures with the stated purpose as to how to make the lending facility reach the people and encourage the banking and finance sector to bring about improvements in the economy.

“Money ends up being trapped in the financial sector rather being invested in other things,” says Kate Raworth, author of the book ‘Doughnut Economics’ published in 2017 and translated into 18 languages. Pakistan is no exception to what she says about the developed financial markets.

The State Bank data shows that scheduled banks’ investments in government papers shot up by 40pc during 2019-20 to reach a record high of over Rs11 trillion.

Pakistan is suffering from both supply and demand shocks. And to quote Raworth there is no equilibrium in supply and demand in the real world. Economic theories, she says, overlook the unpredictable boom and bust cycles.

Her advice to policymakers is: forget economic theories and concentrate on welfare. And common good requires that fairness should trump greed.