A Question of Affordability

A cornerstone of Pakistan Tehreek-e-Insaf’s election pitch in 2018 was the commitment to construct five million affordable houses for low-income groups in Pakistan under the Naya Pakistan Housing Program (NPHP). The underlying objectives were two-fold. First, since the construction industry generates a high level of direct employment, whilst stimulating demand in over 40 ancillary sectors, including cement, steel, paint, brick, building and consumer durables, the rationale was that the programme would drive both economic growth and job creation across multiple industries. Second, a government-led affordable housing scheme would finally allow the underprivileged segments to ‘own’ a house, a pipe dream for low-income groups in Pakistan.

Current statistics are a stark reminder of how skewed the housing market is towards the affluent class. Only one percent of the housing units developed annually cater to 68% of Pakistan’s population (people earning a maximum monthly income of Rs 30,000). Conversely, almost 56% of housing units target 12% of the population – individuals with a monthly income of Rs 100,000 and above (source: Research Report by Ansaar Management Company, 2016).

Hardly surprising therefore that Pakistan has a housing backlog of almost 10 to 12 million units and an expected incremental demand of 300,000 to 350,000 units added on annually (source: World Bank and Government of Pakistan estimates). Given this supply shortage, 40 to 50% of the urban population is living in slums and squatter settlements (katchi abadis) that lack the most basic utilities such as clean drinking water, sanitation and electricity.

As the first step towards delivering on the promise of affordable housing, NPHP was officially launched in April 2019, with the goal of constructing 135,000 houses in the first phase (110,000 in Balochistan for the fishermen of Gwadar and 25,000 in Islamabad for public sector employees).

Although the government’s plans and SBP policies are commendable, most builders and developers are sceptical about whether the houses built under NPHP will be affordable to the target demographic (households earning Rs 60,000 or less) even if banks step up and provide the required volume and value of mortgages.

In theory, the successful completion of NPHP (completion and transfer of ownership of five million houses in five years) should go a long way in reducing the supply-demand gap in housing for the lower income segments. However, similar to the fate of most major public housing programmes in the past, NPHP is struggling to take off. In addition to structural bottlenecks in the construction industry, delays in obtaining NOCs and approvals from government authorities to start construction and the absence of formal mortgage financing facilities were the two issues most often cited by builders and developers contacted for this story, all of whom spoke on the condition of anonymity given the sensitive nature of their involvement with NPHP.

These challenges were exacerbated when Covid-19 brought all economic and construction activities to a halt across Pakistan in March this year. This proved to be a major blow to the project’s timeline and promised deliverables, not to mention the financial losses sustained by builders and developers. However, as the curve of new Covid-19 cases began to decline, construction was one of the first sectors allowed to resume operations, for the simple reason that construction activity would trigger demand in related industries while creating new employment opportunities for unskilled and semi-skilled labour. From economic and public policy experts to the business community, there was consensus that the construction sector would trigger a much-needed economic revival.

As one developer involved in NPHP in Balochistan says, “Of the multiple commercial and residential projects underway, if NPHP comes even close to achieving the targeted milestones, the potential of the positive ripple effect on other projects and the construction industry itself will be massive.” In his view, given the amount of public attention NPHP has received as PTI’s flagship project, the government is highly motivated to come close to delivering on this commitment.

It is interesting to note that even the stakeholders who stand to benefit directly from the success of NPHP do not expect the construction of five million units to be achieved within the remaining tenure of the government, given the delays the project has encountered and the challenges that are yet to be resolved. The expectation is that even if 50% of the houses are completed with successful transfer of ownership, the much-needed economic recovery and uplift of the underprivileged communities will be on its way. According to initial estimates, the delivery of 2.5 million houses will result in 10 million new jobs per year in the unskilled, semi-skilled and skilled categories, as well as an additional 1-1.5 million jobs in banking, security, maintenance, insurance and other related service industries. Furthermore, the overall contribution to the economy from housing, allied and service industries due to NPHP alone would be approximately eight to nine trillion rupees.

Given the economic potential of NPHP, it is not surprising that in July this year, after announcing incentives and subsidies for the construction industry, the government announced an incentives package specifically for NPHP.

As the target buyers of NPHP are cash-starved, the original financial model stipulated that in order to obtain ownership, people would have to make a down payment of 20% of the value of the unit (unit values were estimated at three million rupees at the time of the launch of the project, but delays and increases in the cost of materials and labour mean that the actual price at the time of delivery will be significantly higher). The remaining 80% of the cost would be financed via house mortgages provided by banks at an estimated mark-up of 10%.

The project not only incentivises buyers, but builders and developers as well. These include providing land to builders on instalments (purchase of land for construction requires a massive capital outlay which adds to the upfront cost for builders), thereby allowing construction to start without such a massive initial investment. Moreover, builders were promised they would receive loans from banks to overcome any cash flow shortages they may experience during the project to ensure that construction does not stop and deliveries are made to owners on the announced dates.

To recover from the setback affecting NPHP in the aftermath of Covid-19, in addition to the incentives package for the construction industry, in July the government announced policies specifically aimed at reigniting investor interest. This included a subsidy of Rs 30 billion for houses to be constructed as part of NPHP. More importantly, subsidised mortgage financing has been announced for a period of up to five years at five percent for five marla and seven percent for 10 marla houses. In addition, the State Bank of Pakistan (SBP) has set a mandatory lending target for all commercial banks equivalent to five percent of their outstanding private sector credit, which would translate into mortgages for housing and construction to the tune of Rs 300 billion by the end of the next year. The subsidy and the increased targeted lending will go a long way in bringing Pakistan’s house financing facility (it stands at a meagre 0.2%) more at par with the neighbouring economies of India (10%) and Malaysia (30%), thereby increasing the overall affordability of housing in the country.

According to Mohsin Sheikhani, Chairman, Association of Builders and Developers of Pakistan (ABAD), “Home mortgages are the principle on which the global real estate industry operates and this is a non-existent concept in Pakistan. Home financing offered by commercial banks is limited to high-net income earners because of the extensive collateral requirements as well as exorbitant mortgage rates, making it impossible for middle income and lower income segments to use the facility.”

Although the government’s plans and SBP policies are commendable, most builders and developers are sceptical about whether the houses built under NPHP will be affordable to the target demographic (households earning Rs 60,000 or less) even if banks step up and provide the required volume and value of mortgages.

Tables 1 and 2 reflect the affordability gap between the monthly instalment amount that would be affordable to different income segments and the debt burden on families looking to own a housing unit under NPHP. A comparison of the average household incomes of Pakistani households and the advertised prices of NPHP housing projects make it clear that almost 80% of the population will not be able to make the down payment or afford the monthly instalments, even at the subsidised interest rates. The lowest monthly mortgage instalment in NPHP is Rs 15,618, which is higher than the sustainable monthly instalment amount for the lowest four quintiles of Pakistan’s population.

Furthermore, regardless of the lending targets specified by SBP, commercial banks will not be incentivised to increase their mortgage portfolio until clear and strict foreclosure laws are enacted. At present, banks are unable to recover their losses in case of defaults by resuming control over mortgaged properties and selling them, especially with the added risk that the property may be tied up in the courts for years.

Lastly, the fact that most of the units planned under NPHP are standalone, independent units further complicates the issue of affordability. The large swathes of unused land needed for such projects are scarce in large cities and where available, the cost is exorbitant. This is why the builders and developers contacted for this story are of the view that the focus of low-cost housing projects should be on constructing pre-fabricated, two to three bedroom apartments in high-rise buildings on state-owned land. This will allow the construction of more units per acre while ensuring that the final price of the completed units remains within the budget of the financially vulnerable.

Ayesha Shaikh is a freelance writer. ayeshasamadshaikh@gmail.com