The Housing Conundrum: Low interest rates but high property prices

July 19, 2021 (MLN): Ever since coming to power in 2018, the PTI government has been heavy on promoting the housing sector, even promising the unrealistically ambitious target of building 10 million units.

While that was obviously too good to be materialised, it has taken a number of measures – along with the State Bank of Pakistan – to make access to house finance a little easier.

That included over Rs30 billion earmarked for the Naya Pakistan Housing Development Authority which will be utilised towards subsidizing Rs300,000 for low-income groups. Even more importantly, a refinancing scheme at cheaper than market rates was unveiled a few months ago by the SBP. In layperson terms, the central bank has extended a special credit line to banks starting at one per cent cost of capital, who are then mandated to lend to customers at fixed rates for the first and second five-year periods, after which the markup will be based on the variable Karachi Interbank Offer Rate plus a spread, that varies across tiers.

To understand why a fixed rate matters, especially for something long-term like housing, it’s important to look at the historical trajectory of Kibor, which has oscillated wildly along with the boom-and-bust cycle that our economy is so used to. For context, KIBOR 6M stood over 13% just at the beginning of March 2020 before coming down to around 7.5% towards the end of April. From a borrower’s perspective, the problem starts when the rate moves in the opposite direction, which it does every 2-3 years. So, for a loan of around Rs5 million, a change of 7 percentage points in KIBOR can have an impact of about Rs350,000.

Anyway, coming to the scheme, it also loosens the criteria for accessing housing loan as any first-time home-owning man or woman holding a valid CNIC is deemed eligible. Salary requirements have been kept low along with provisions to club the income of up to four individuals. There are 4 tiers – from 0 to 3 – each with its own financing limit and interest rate.

Tier 0 is meant for microfinance banks and applicants can borrow a maximum of Rs2mn at 5% for the first five years and 7% for the next. The second slab – Tier 1 – is the only option available exclusively for the government’s much hyped NAPHDA projects with a loan limit of Rs2.7mn and a cap on the housing unit’s price at Rs3.5mn. This category also has the cheapest markup at 3% and 5% for the first and second five-year periods.

The remaining two categories – Tier 2 and 3 set maximum loan amounts at Rs6mn and Rs10mn respectively at interest rates of 5%/7% and 7%/9% with no cap on the price of unit, along with a temporary relaxation until March 2023 that the house may not necessarily be a new construction. The first three slabs prescribe that the size of the house should not be bigger than 125 sq yds (5 Marla) or flat up to 1,250 sq ft (or in case of Tier 1, 850 sq ft). Tier 4 is much more lenient as it allows a maximum property size of 250 sq yd for a house or 2,000 sq ft in case of a flat.

It’s no secret from anyone that Pakistani banks have traditionally undeserved their lending functions, especially in the housing arena, instead opting for the much safer and more lucrative treasury bills and bonds. To nudge them a little, the SBP has mandated that at least 5% of their lending portfolio be exposed to housing/real estate.

That push from the government and regulator seems to be working. “The entire process from request to approval took 14 days,” says a successful applicant from Karachi who has secured Rs4.7mn loan under the second tier and now looks forward to replacing his rented apartment to a mortgaged one.

“I submitted my application to Habib Metro, where I have my account, with the usual documents such as the proof of salary and property papers. By the 14th day, it was approved,” he added.

According to a private bank’s CEO, financial institutions have become much more aggressive since the revised circular was introduced, which relaxed the conditions for Tier 2 and 3 by eliminating new construction requirements and raised the financing limit for the latter. Before that, there was a serious supply shortage.

However, this relaxation on old constructions is only until March 2023, after which any activity in the housing finance will depend on new supply coming live. For that, the government is hoping its amnesty to builders will help, but looking at the grandeur of projects currently listed with the Federal Board of Revenue so far, there is a good reason to believe that many would be beyond the reach of an average citizen, forget even the lowest income group. In fact, the property prices are already on the rise, having gone up by 6.4% over the last 12 months to Rs13,745 per sq ft in Karachi, according to Zameen’s index.

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