By Dr. Ayaz Ahmed
Pakistan, like other developing countries, has been facing shortage of housing units. This fundamental human need is acting more significantly at the base of the population pyramid. Authorities have observed that interest for new homes is around 700,000 units/year. But only a small portion of this interest is met. In general, the housing deficiency is assessed at 10 million units and is becoming increasing at a rapid rate. The formal financial sector has failed to provide financing for a large segment of our growing population. The combined volume of outstanding housing finance was only PKR 92.4 billion in December 2018.
Issues faced by housing industry
The housing finance market has been under pressure by both supply and demand side challenges. Industry faces numerous supply side issues: inadequate foreclosure mechanism, uncertainty of title deeds, no innovative products, risk of maturity mismatch and lack of skilled mortgaged bankers. Similarly, key demand side issues: escalating property prices, lack of financing products, unavailability of formal financial services and volatility in interest rates.
As mentioned above, housing finance is hovering around PKR 92 billion, which is just 1.7% of private sector credit. Government policy is to increase housing finance up to 6% of private sector credit over a period of five years. The aim is to build five million housing units during their tenure.
State Bank Role and Policies
In order to route credit to low cost housing borrowers, SBP has allocated targets to banks. SBP has assigned a target from April 2019 onwards for each bank. Banks are advised to incorporate the assigned targets in their overall business plan and also creating departmental targets/goals. This is now incorporated in the Board of Directors (BoDs) assessment of the bank management. SBP also periodically monitor the targets and banks’ performance.
Mortgage products by and large are homogeneous in Pakistan across the financial institutions. In order to ensure takeoff of the housing finance, there is a dire need of product innovation. Housing finance is currently dominating by variant rates of mortgages with no fixed rate mortgage specifically. This is not a good sign for the housing industry. Introducing fixed rate mortgage will provide needed comfort to the borrowers against fluctuating interest rates. We also require mortgage products tailored by varied income brackets. Government must encourage Banks to introduce innovative products, which may include the following features/options:
- Availability of fixed/hybrid rate (floating and fixed).
- Availability of specified interest-only period products to make regular home loans affordable.
- Allowing initial installments with lower amounts and a repayment schedule linked to borrower’s income will create easy payment modes.
- Discounted rates for borrowers through institutional arrangements with various public/private sector entities.
- Availability of flexible tenures and maximum loan tenure as allowed under Prudential Regulations for Housing Finance.
- Products with no prepayment penalty option.
Recommendations and Government initiative
The present government ow cost housing units initiative will provide shelters to poor segments of society. It will also generate economic activity in 30 to 40 industries. It will create job opportunities for unskilled workers to semi-skilled and as well as professional workers. However, government must ensure house allocation is to truly deserving people through a transparent and fair process. Further government also need to create a check that the allottees are not further rent out or sell these houses to make money and implementing of this strategy is possible by incorporating some laws in the property documents.
Government also needs to acknowledge the role of existing private housing schemes in fulfilling this housing demand and should go extra miles in facilitating and expediting their work. We need strict measures against fake and illegal housing schemes that loot poor people’s precious money. The government must ensure that while launching the initiative of 5 million houses or any other housing scheme; we do not use fertile agricultural lands for launching the government’s initiative of 5 million houses.