Economic Viability of Affordable Housing

1. Economic Viability of Affordable Housing Naheed Memon National Workshop: Affordable Housing NED University of Engineering and Technology, Karachi. March 9th 2019

2. Naya Pakistan Housing Program(NPHP)- Important Features and realities • Constitutional Right under Article 38 D, Article 25, Article 14 • Housing finance is Rs. 83 billion (0.5 to GDP) with 68,000 borrowers • Yearly demand for housing 0.7 million housing units. Currently, half of it is met. • Government to provide land • Ownership rights- to be given to the benefactors • Government claims cost of a housing unit to be 15 to 20% lower than the current market price. (Due to provision of public land?) • Registration(survey) being conducted to gauge the demand and its nature and priorities of potential benefactors • Slums lands to be used and provided by the government for vertical buildings, residents of slums to be given owner rights

3. Why is there a housing crisis? Supply side issues: • Ineffective foreclosure laws • Uncertainty of title deeds • Bank’s general preference for investment in government securities • Risk of maturity mismatch due to unavailability of long term funding. Demand side issues: • Escalating property prices • Dearth of financing products • Unavailability of formal financial services and volatility in interest rates. • Lack of trust on banks • Real estate industry

4. Why is there a Housing Crisis in Pakistan? • Ninety nine percent of housing in the formal market is beyond the buying reach of 68pc of the population. • According to the State Bank of Pakistan, the house price-to-income ratio in Pakistan is 20:1 (compared to a global average of 5:1). • Between 2012 and 2017, housing prices in Pakistan more than doubled and rents grew by 180pc, while incomes grew by only 15pc in the same period.

5. Why is there a Housing Crisis in Pakistan? • In the absence of regulatory & financial oversight has enabled “the trading of real estate as a commodity by speculative investors”. • Ineffective legal framework • Lack of land reforms • Any government plan that keeps land as collateral runs the high risk of ending up in the hand of private sector developers similar to the gates community such as the Bahria Town. • Despite boasting assets now estimated at $700bn, the real estate sector contributed just Rs23bn in tax revenue in 2018 — less than 0.1pc of GDP.

6. Challenges to affordable housing programs in past • During the PMLN government of 2013-2018, multiple low-income and/or affordable housing provision • Committees were formed and financial models were discussed, but schemes did not get off the ground for multiple reasons. • Land acquisition, the biggest issue • Urban and rural planning • Environmental considerations • Power structures and socio-economic data • No survey of various schemes of past and current situations potential benefactors are living

7. Economic Viability of the program • Cost to be around 180 billion $ • 36 billion $ per year which is equal to yearly tax revenue $36 billion • 5 million homes cannot be achieved because of the ambitious target • Introducing mortgage facility and mortgage finance model • To increase the financial resources of the banks the following sources of funds will be considered: • Pension funds • Zakat funds • Provident funds • Funds at the disposal of insurance companies • EOBI • Social Security institutions

8. Economic Viability of the program • Raise funds through the issuance of • Sub-sovereign bonds • Municipality housing • Sukuk bonds (A commercial paper?) • Commercial banks will not extend affordable mortgage credit in the current economic reality of high interest rates. • It is not possible when total loan portfolio of the private sector does not exceed 33 billion $.

9. Targets of PTI government according to their website:

10. Questions Unanswered • The model of acquiring of public land either on market value or free of cost or somewhere in between? • If ownership rights given, will it not create secondary market and trading? • How these houses will cost15-20% lower than market price • Fixed or adjustable mortgage rates? • Interest rate is expected to rise to 14 % in 2019, what effect will it have on the mortgage rate • No information on value of housing unit or monthly repayments? • State Bank of Pakistan to establish a National Financial Regulatory Body to regulate and facilitate the mortgage industry.(No progress yet)

11. Continued. . . • Law ministry to do necessary legal framework for ensuring land in next two months (No progress yet) • Government insured mortgage? • To be financed on cost of other welfare projects? • Below market interest rate? • Time period of mortgage?? If short term meaning higher interest rate and repayment installments Other promises • 6mn jobs • Create demand in 40 industries directly involved in house building • Attract FDI- when stock exchange is not stable

12. Examples to learn from: • The Singapore Model • The successful housing program in Singapore (since independence 1965) hinges on a state-controlled, tightly regulated market for land and real estate development. • Today, 90% of land is owned by the state as opposed to 49% in 1965. Great emphasis is placed on standardization and efficiencies in construction management. • The Indonesian Model • Indonesia also faced a housing shortage of 11.8 million in 2013. • Subsidizedmortgages for low-cost properties, while discouraging speculative buying. • Below-market interest rates. • The Government took initiatives to provide state subsidy to the banks that dispense those mortgages. Housing Finance Liquidity Facilityloans were used to buy 87,765 units in 2013.

13. Some example to learn from: • Thailand based Asian Coalition for Housing Rights and the Community Organizations Development Institute (CODI). • Orangi Pilot Project of Karachi • Largest slum in the world • Upliftment which involved the local residents solving their own sanitation problems. • Innovative methods were used to provide adequate low cost sanitation, health,housing  and microfinancefacilities. • Informal sector of housing

17. What can go wrong? • US Subprime mortgage (secondary market transactions) • Market crash and loss transferred to the benefactor • Housing program on cost of other welfare project • Developer and banks to make huge profits • Environmental risks • Demographic crisis

18. Conclusion • Capacity building regarding mortgage financing • Mandatory lending • Housing provident fund • Make sure real benefactors are the borrowers and not banks and institutions • Credit guarantee institutions • Low interest rate lending for housing • Annual lending targets for housing target • House loans securitization • Secondary market for mortgages

19. Conclusion • Set targets for low cost housing finances • General reserve requirements for banks • Establishment of Pakistan Mortgage Refinance Company (PMRC) • Establishment and proactive role of Real Estate Regulatory Authority • Contractors and private construction firms must not be beneficiaries the eventual residents of the homes must remain front and center the initiative • Pakistan’s talented collegiate architecture, urban planning and urban design departments. • For flats and houses different policy of mortgages

20. References • Pakistan Tehreek e Insaf • http://www.insaf.pk/public/insafpk/news/naya-pakistan-housing-program-corner-stone • State Bank of Pakistan • http://www.sbp.org.pk/smefd/2018/Policy-Promotion-Low-Cost-Housing-Finance.pdf