In a country of over 220 million, an almost non-existent housing market sounds mind boggling. At the moment, Pakistan’s housing finance-to-GDP ratio is around 0.5% against nearly 10% in India and 85% in countries like the Netherlands. And it’s not because the market is saturated or there is an absence of demand, the issue lies with how the country’s housing market is structured.
Data released by the State Bank of Pakistan (SBP) showed that despite various incentives offered by the government, growth in housing finance remains at undesirable levels. Between July 2020 and March 2021, commercial banks’ housing finance lending increased to Rs228.3 billion, from Rs189.6bn, representing an increase of 20% year-on-year.
Assuming an average loan size of Rs2.5m, there are currently only 91,320 active housing borrowers in the country. On the other hand, the Rs228.3bn also includes Rs134.8bn in housing loans given out by commercial banks to their own employees. Subtract that from the tally, the total housing loans to the 220m people (minus the bank employees) was just Rs93.5bn. With loan size of Rs2.5m, that essentially means only 37,400 people in the country have availed housing loans by the end of March 2021 whereas total commercial bank employees to have benefited from the facility stands at 54,000.
The push for housing has been renewed by Prime Minister Imran Khan who has vowed to clear half of the housing backlog in the country after he promised to build 5m housing units. In line with these goals, the SBP and government unveiled cheap loans for housing applicants and even forced banks to at least disburse 5pc of their total private sector loan portfolio to housing applicants.
However, looking at the attractive interest rates for housing loans being pushed by the SBP and the government, one would assume a sharp uptick in housing loans. That hasn’t been the case either.
During July-March FY21, the total housing portfolio of commercial banks increased by Rs38.7bn which just means only 15,500 new applications were processed. And it’s not like that there isn’t much demand for housing – either in urban or rural areas. Some estimates put Pakistan’s housing backlog at around 11m of which nearly 7m is in rural areas and the rest in urban regions. With the current growth rate of 2% per annum, Pakistan will be the fifth most populous country in the world by 2050 with the shortfall set to increase by 270,000 homes per annum.
So what is going on here? Most of the experts in the field say that this is a supply-side issue and investors are unwilling to set up low-cost housing projects in the country.
Under the PM’s package, investors were invited to invest and set up low-cost housing projects with price caps for unit prices. Builders are reluctant to participate in this segment because of the low price caps. On the other hand, bankers complain that a large chunk of borrowers in the low-cost segment don’t meet the requisite risk criteria as they do not have the required income or credit profile to be eligible for the loans.
Regardless of the demand or supply, absence of foreclosure laws and failure to expedite banking cases will continue to hemorrhage the housing finance market. The banks, despite their willingness, are not ready to park bad loans unless there are legal procedures set out in advance.
A banker talking to MG News said the government will have to do the heavy lifting in the beginning. Using government land, it can set up low-cost housing units across the country which can then be replicated by the private sector. Until then, the housing market would see a short spike in the short-term but remain stagnant over the medium to long term.
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