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HOUSING FINANCE

The Road to 5 Million Houses

If there is one sector that could be termed as the Prime Minister’s priority area in his idea of a prosperous and Naya Pakistan, it is the housing sector. It is especially because various housing sector surveys reveal that Pakistan is currently facing a housing backlog of almost 10 million units; 4 million of which is in urban areas alone. This backlog is increasing at a rate of 0.7 million units every year and thus shortage is expected to grow over 13 million by 2025. It has happened because the supply could not keep pace with the fast growing population in need of formal housing.
According to the State Bank of Pakistan (SBP), the demand for urban housing is going up by 350,000 units every year, against which merely 150,000 units are being supplied. As per the data, more than 60% of the housing demand is coming from low-income segments, while the supply is predominantly catered to middle and upper middle-income groups. Therefore, there is an even greater mismatch in the provision of low-income housing. The situation becomes more complex due to feeble access of borrowers to mortgage financing.
Evidence suggests that the current stock disproportionately targets high-income segments of the population that can absorb the rising prices of properties and buy with ready cash. This system has invariably left a huge portion of the population out of the market. At the very outset, the PTI government decided to put housing at the epicenter of its economic agenda for the country and since then, a host of efforts have been made to ultimately achieve a mammoth supply of 5 million houses in the country.
Low-cost housing, in particular, is a vast area where no or little work has been done in Pakistan in the past. The Naya Pakistan Housing Scheme that envisaged building five million homes for the low-income group will remain a pipedream unless fundamental changes are made to the scheme using the customer lens.
As of May 2021, while there has been traction in lending to construction companies — thanks to major tax concessions and the opportunity to whiten money — the actual number of low-cost housing loans is a paltry 610 with the disbursed amount being Rs1.3 billion for the entire banking industry.
This disappointing figure is not due to the lack of focus on part of the State Bank of Pakistan (SBP). Rather, it’s because of some fundamental issues with the programme whose creators neglected to review the primary need of the low-income group.
The first disconnect was the eligibility restrictions imposed by the Naya Pakistan Housing and Development Authority (NAPHDA) for accessing the scheme. The SBP, after consultation with the industry, has now made three major changes that should result in higher loan disbursement. The facility has now waived the requirement of the minimum one-year-old housing unit. The restriction on the first transfer has also been removed albeit temporarily. The markup subsidy has been further reduced from 5pc to 3pc while increasing the amount to Rs10m. This will allow borrowers to equate the monthly loan instalment with their existing monthly rental.
Lastly, a new tier has been added to the existing three tiers. Tier 0 has been added to help microfinance banks extend loans up to Rs2 million. Microfinance banks can either use their funds or obtain funding from commercial banks. On the face of it, with a 40pc first loss provided by the government and subsidised lending by the SBP, the desired number of 5 million should be achievable given the housing shortfall of 12 million units.
However, housing has now become a priority initiative of the government and the country, under the current government, seems to have come a long way towards addressing the problem, although the journey has just begun and there is a long way to go. The SBP is playing a pivotal role through policy intervention and monitoring to facilitate and ensure enabling mortgage financing environment. For banks, lending to the sector remains a challenge owing to various reasons, including income evaluation for informal/ undocumented sector, demand and supply gap of housing units, unplanned and unapproved constructions at various sites, tedious documentation and inconducive mortgage charge creation process, etc.
In one of its report on the state of economy, the SBP had highlighted how mortgages usually hold a dominant position in the overall private sector credit in a large number of countries in Asia. The housing finance in the likes of Malaysia, South Korea, and Singapore falls in the range of 50-70 percent of the GDP.
The BRICS countries, for instance, have banks lending in lieu of housing finance that goes as high as 55 percent of GDP. Pakistan, on the other hand, lies at the other end of the extreme. Countless operational and procedural hiccups have kept Pakistani banks away from venturing aggressively in housing finance.
Land entitlement and registry are two key factors that could impede housing finance if not dealt with properly. Banks’ robust risk assessment and compliance requirements mean critical information about ownership status, history and valuation of property, is seamlessly available at all times. When entitlement and other documentation is speedy and smooth, it makes matters lot easier for banks to use properties as strong collaterals and disburse loans.
Land registration was a cumbersome procedure in Pakistan until very recently which kept the banks away from mortgage financing, as it involved transparency issues and bureaucratic hurdles. Furthermore, the housing backlog is further exacerbated by substantially low official property valuation rates and weak regulatory oversight of the real estate sector. Under documentation and overpriced properties are a result, which further increases the housing backlog. People in genuine need for housing are often left behind because of speculative pricing, where plot buying is rampant and is not backed by property development.
Affordability concerns have also presented challenges towards housing, as according to the State Bank of Pakistan, assuming a 15-year maturity period, the required monthly income to afford mortgage installments is over 3 times the average household income.
The legal framework has often been cited by banks as the core reason why banks shy away from lending to households. The foreclosure laws, for the longest time, were considered debtor-friendly, increasing the bank’s risk exposure. The central bank amended the relevant laws and formulated the rules, which have also been upheld by the courts. This should go a long way in addressing some of the key concerns of the banks towards offering mortgages.
The government has undertaken significant steps having adopted a six-pronged strategy to create an enabling environment for affordable housing finance. The land entitlement reforms are underway and relevant authorities in Punjab and Sindh have worked diligently towards the goal. Millions of old land records have been scanned, while tens of millions have been scanned. The property registration procedures have also been reduced by half, whereas the process has been expedited by cutting the registration days by a third to only 18. Use of technology has also been adopted, where Geographical Information System (GIS) is being used to map areas and being linked with scanned land records.
The government announced the Naya Pakistan Housing Project (NPHP) on October 10, 2018, with a rather ambitious aim to establish 5 million housing units across width and breath of Pakistan, specifically to fulfil the housing needs of the lower-income class. The SBP, in a bid to further the government’s aim devised a well-rounded policy package for low-cost housing finance.
The SBP policy package has been instrumental in kickstarting the progress as it entails refinance facility for low-cost housing for special segments, regulatory relaxations to banks, mandatory housing finance targets, among others. One big policy change that the SBP made was to assign commercial banks mandatory targets to increase housing and construction financing to at least 5 percent of their private loan portfolios by December 2021.
The SBP’s special note on the government’s efforts for housing finance also lauds the government’s efforts through the operationalization of mortgage refinancing company. The SBP note states that “further impetus to domestic mortgage financing comes with the operationalization of Pakistan Mortgage Refinancing Company (PMRC). Facilitated by the SBP, the PMRC aims to develop the primary mortgage market by: (i) providing financial resources so that primary mortgage lenders can grant more loans to households at fixed/hybrid rates for longer tenure; (ii) reducing the mismatch between house loan maturities and source of funds; and (iii) ensuring loan standardization across primary lending institutions.”
The legal system and foreclosure laws have also seen improvement, with the FIRO Act 2016 amended for the relevant clauses. The work on Real Estate Regulatory Authority in progress aims to provide more secure rights and protection to land-owners, and will keep speculative investments away, in addition to a crackdown on wealth concealment activities.
To further spur demand for housing finance, construction industry which is the mainstay of all housing activities has also been offered tremendous incentives. Last year, the government offered exemption from withholding tax rates, formation of national coordination committee on housing, construction and development, offered markup subsidy facility, implemented fixed tax rates, reduced number of NOCs, and provided one-window operations. All these steps are expected to yield good results down the road.
The government has also set up a special Steering Committee for Housing and Construction Finance that is tasked with facilitating and laying out guidelines around risk-acceptance criteria for builder selection and end-user mortgage financing, further regulatory facilitation for enabling environment, developing proxies for informal income assessment, offering standardized loan documentation and processing, facilitation for developers and housing finance under NAPHDA projects and development of technology-based solution for customer information exchange between banks and relevant government departments.
Changes have recently been made to make mortgage financing more viable and practical. By incorporating a new tier 0 (T0) and enhancing the limits of housing units’ prices and loans for Tier 2 and Tier 3, banks are expected to be more aggressive towards offering mortgages.
Initially, the cap of housing price was too low, leaving banks with customers which had never been users of consumer finance and/or belonged to the low and low-middle income group. The cap on housing finance was also believed to be too low, and secondly, the rules of the game did not extend the subsidy to microfinance banks and Non-Banking Finance Companies (NBFCs). That is where the take-off was slow, and changes had to be made.
It is heartening to see the Naya Pakistan Housing Development Authority realizing the areas that needed attention. Microfinance banks and NBFCs have been now added to the list directly and indirectly, along with a revised tier structure for housing finance, that promises to address the affordability question to a greater extent than the previous structure.
The details of the revised limits and markups are readily available with the relevant institutions. What is clear is that the revised structure allows more genuine customers better access to housing finance at more affordable rates, in line with the buying power. Better land titles and foreclosure laws will help develop the ecosystem and encourage the private sector to be the major participant on the development end.
The dream of 5 million housing units in 5 years may be too big, and some may even call it elusive, but it worth seeing, and worth working towards it. Achieving even a quarter of it, will do no harm to the country’s economic prospects and to the people who will have a place to call “home”.
The Naya Pakistan housing initiative can be a game-changer. To empower the low-income groups across Pakistan to own their homes is what dreams are made of. Building a home engages about 21 different industries and can have a significant impact on our stressed economy. Housing finance can be coupled with alternative energy solutions, general and personal insurance and clean water to make a lasting change on how the low-income group lives. However, to move this needle, good intentions are not enough and the pain points of the grassroots borrowers need to be addressed. The recent amendments are clearly a step in the right direction. Unfortunately, without the other changes, the promise of 5 million housing units in five years will remain a pipedream.