EDITORIAL: The construction boom is visible as the market is flooded with developers and new projects. Land prices are booming, and the perception is that the construction amnesty scheme has been captured by the elite. The activities in land trading are fuelled by speculation. Although policy incentives have encouraged banks to focus on house finance, the affordability for the middle class is simply missing. The other problem is the lack of low-cost housing which was supposed to be the focus of PTI government's housing policy. The SBP announced subsidy for low-cost and affordable housing in October 2020. The subsidy financing was divided into four tiers, including the one for the Naya Pakistan Housing and Development Authority (NAPHDA) where there was an additional Rs 300,000 per unit subsidy on principal. The programme was revised again in March 2021 with additional incentives such as increase in loan amount for different tiers to respond to rising housing prices. Now a maximum loan of Rs 10 million can be taken for a house of up to 10 marla (250 square yards) or an apartment of 2,000 square feet.
Since no low-cost projects existed at the time, NAPHDA announced the scheme for housing projects that included units catering to middle to low income families. However, one indicator suggests that some activity is finally taking place under low-cost housing. In a fresh press release, SBP has noted that Rs 154 billion worth of housing loans under affordable housing (maximum loan limit of Rs 10 million) have been requested by consumers. Out of this, Rs 59 billion has been approved by banks of which Rs 11.5 billion has been disbursed so far. In housing finance, unless you buy a built-up unit, disbursement takes place in chunks. Estimates suggest that around Rs 10-15 billion of approved loans are for projects that are currently under construction, and disbursements are planned in a staggered manner. This means consumer financing worth Rs 20-25 billion of low-cost housing has already been sanctioned. Assuming that there are 60 percent loan to value (LTV) and an average house price of Rs 7 million, around 6,000 affordable housing units are being financed by commercial banks.
The number was zero prior to the Naya Pakistan Housing initiative. Now the ball has been set rolling, but it is far from the potential which runs into millions. Another interesting aspect is that only around 40 percent of approved loans have supply of houses. As in rest of the cases, buyers are essentially finding houses to buy once they secure financing.
The real challenge is supply of low-cost housing as commercial viability is missing. To bridge the gap, subsidised financing and first loss guarantees for banks have been announced. Things shall roll out slowly. A few projects are under development - not construction; but they are not more than a handful.
The mistake the government seems to have made under the pressure of builders and developers was giving supply-side taxation and regulatory incentives for all forms of housing. The tax is fixed in per square-feet and is ridiculously low for high-end projects. The government needs to tax income of developers in high-end projects and should keep a lower tax for low-cost units to incentivize supply. Moreover, it should support projects with mixed development where commercial and mid-to-high end housing cross-subsidizes low-cost housing. Another way to create supply is for SBP to ensure demand in various clusters. It was established earlier that around 60 percent of Rs 59 billion approved financing has so far not been disbursed. This is a confirmed demand with financing available, but supply is still awaited. This can be worth 7,000 to 8,000 housing units. SBP has all the data from banks and can make a dashboard to show how much loans are being approved in a certain city or area within a city. Once more information is available, builders can plan future projects. And for quick supply, NAPHDA has a role to play. One project of LDA City is being processed with around 4,000 units. A few others are coming, and the government can make 15,000 to 20,000 units. The demand supposedly runs in millions. This will be a long journey which has only just begun. The focus of policymakers should be on facilitating supply of housing in low- and middle-income groups without letting speculation run out of control.