Towards Affordable Housing

Housing, especially affordable housing, is the Prime Minister’s dream. The government earlier came up with a scheme of subsidized loans for affordable housing. There was some push from SBP on banks to take these seriously. However, due to some limitations on pricing and financing, the response was lackluster.

Recently, changes have been made to make mortgage financing more viable and practical. Experts are of the opinion that by incorporating a new tier 0 (T0) and enhancing the limits of housing units’ prices and loans for Tier 2 and Tier 3, banks may finally start giving mortgages. Now with a consumer banker being the finance minister, the optimism of housing finance may start translating into realism.

Without mortgage financing, affordable housing is hard to spur. The developed world has done that in the 20th century. And in the last few decades, developing and emerging economies moved up the housing ladder through penetration in the housing finance. In the past fifteen years, India has moved up in mortgage financing from less than 1 percent of GDP to over 10 percent. While Pakistan is still struggling to cross 1 percent of GDP in housing finance.

The central bank gave targets to banks to reach 5 percent of their loan portfolio in housing and construction by Dec 2021 with penalties on not meeting quarterly targets. Concurrently, the federal government came with interest rate subsidy mechanism to make the housing consumer finance affordable.

One of the reasons for low housing finance uptake is higher interest rates – the mortgage payment as a rule of thumb should be around 30—35 percent of the disposable income. At higher interest rates and low per capita income, this affordability was simply missing. Not to mention there were supply side issues (such as foreclosure laws) which are also dealt with independently.

The government announced subsidy and came with three tiers of housing finance; but the cap of housing price was too low and that had left banks to deal with costumers (low and low-middle income) which never were the clients of banks in any other form of consumer finance (such as auto finance). That was a non-starter. For two reasons. One is too low cap on housing price and second is not allowing the subsidy for microfinance banks and Non-Banking Finance Companies (NBFCs).

It is good that NAPHDA realized these shortcomings soon and came up with revised tiers with the inclusion of microfinance banks directly and microfinance non-banks indirectly. In the smaller loans (T0), the subsidy spread has been kept high to let the microfinance banks come and compete given their high operation and funding costs. Since they have expertise in low-income group, there is a good chance of success.

In T0, the maximum loan size for single unit is capped at Rs2 million and the customer pricing is fixed at 5 percent for first 5 years and 7 percent for the next 5 years. The bank pricing is kept at KIBOR+700bps. Here the spread is kept higher to allow microfinance banks to cover their higher operational and funding costs. The housing size is limited to 5 marla (125 sq yards) or flat with covered area of 1,250 sq feet.

Earlier microfinance banks were not allowed; but now they are to directly enjoy the subsidy. However, NBFCs in micro segment are still not directly allowed to get the subsidy as these are not regulated by SBP. However, commercial banks or microfinance banks can sign up with microfinance nonbanking institutes to underwrite loans, while operationally it is to be managed by non-banks and these MFIs can charge operational fee from banks.

The other three tiers (T1, T2 and T3) already exist; but now some changes are made. In T1, the interest rate to be charged from consumer is 3 percent for first 5 years and 5 percent for the subsequent 5 years, while banks can charge up to KIBOR+250 bps. The loan limit is kept at Rs2.7 million and the housing size is of 5 marla (125 sq yard) or flat with covered area of maximum 850 sq feet. These will be NAPHDA approved housing with ensured demand.

The real game changer for commercial banks is the alteration in T2 and T3 where the financing and housing price limits were too low to have middle income groups to be part of it. Now the financing limits are enhanced to Rs6 million for T2 and Rs10 million for T3 with no limits on the housing prices. The housing size is limited at 5 marla (or 1,250 sq ft for flats) for T2 and 10 marla (250 sq yards) for housing and apartment with covered area of up to 2,000 sq feet for T3.

With these revised limits, the bankable customers can access subsidized loans. Banks are already providing auto loans to these. Given the clarity of land titles and implementation of foreclosure laws, banks may jump into this category. On demand, the matrix of affordability can fit in and consumers may opt for these loans.

The ecosystem is to be developed and soon there will be some progress in housing loans. NAPHDA is coming up with its own housing projects in Punjab, KP and Islamabad. The private sector is developing many projects at the same time and there will be number of partnerships of banks with builders to appear soon.

One missing link is to incorporate NBFCs into the system of financing. Since these are regulated by SECP, SBP is not interested. But the experience of other countries shows that the specialized housing financing companies were instrumental in spurring housing finance – especially in India. The SECP is receptive in easing the regulatory landscape for NBFCs and few are coming to specialize in housing. SBP and NAPHDA need to pave way for encouraging special purpose vehicles to come in housing.