Naya Pakistan: Low-Cost Home Loans and Construction Subsidies to Boost Economy
By Riaz Haq
Pakistani Prime Minister Imran Khan has recently announced a new housing construction incentives package that includes down payment assistance and expansion of home loans portfolios by commercial banks at discounted rates for affordable housing for the poor. Pakistan’s mortgage finance to GDP ratio is just 0.25%, among the lowest in the world, according to the World Bank. The average for South Asia 3.4%.
New housing drives a large number of sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances. These incentives are designed to stimulate the economy, boost employment and deal with the growing shortage of affordable housing in the country.
Naya Pakistan Housing
Pakistan government's Naya Pakistan housing program offers Rs. 33 billion in direct subsidies for down payments for the first 100,000 applicants, according to media reports. In addition, the commercial banks are required to allocate 5% of their portfolio amounting to Rs330 billion for construction activities under this program. Pakistan’s mortgage finance to GDP ratio is just 0.25%, among the lowest in the world, according to the World Bank. A person earning Rs30,000 to Rs100,000 can build a house on a 5-marla lot with the mortgage financing at 5% and that of 10-marla at 7%.
Importance of Housing
New Housing Starts are considered a reliable economic indicator in any country that collects routine economic data. Housing sector drives a large number of other sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances.
These sectors, in turn, create jobs, improve people's living standards and widen the tax base. In the United States, for example, homes are the biggest contributors to net worth of Americans. Home equity loans allow people to take out loans for other purposes, including education, business startups and home improvements. Hence, the government’s interest in pursuing pro-housing policies that ensure secure property rights, set aside land for housing and require banks to offer low-cost home loans.
Secure Property Rights
Secure property rights are a pre-requisite for a thriving housing sector. Hernando de Soto Polar, Peruvian economist known for his work on the informal economy and on the importance of business and property rights, told Reuters back in 2016 that “(T)here is no such thing as an investment without property rights that are negotiable and transferable”.
In the United States, the world’s largest economy, the most important source of funds for new businesses is a mortgage on the entrepreneur’s house, de Soto wrote in his book “The Mystery of Capital”. He says that secure property rights for world's poor could unlock trillions in 'dead capital'.
Unfortunately, Pakistan's land title system is among the most corrupt in the country. A patwari, the title for the official keeping land records, is among the most resourceful government officials in much of Pakistan. Patwaris have a well-deserved reputation for corruption. Legally protected and enforced property rights are the key source of the developed world’s prosperity, and the lack thereof is the reason why many nations remain mired in poverty, de Soto has argued.
Housing Finance
Construction loans and mortgages at reasonable rates are essential for people to afford to build and own houses. Policies promoting discount loans and mortgages are the cornerstone of housing policies in the developed world.
In the United States, government-backed mortgage giants like FNMA (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) deploy vast resources to buy mortgages and ensure liquidity in the mortgage market. When lenders make loans for housing based on FNMA or Freddie Mac rules, they are confident they can sell in a highly liquid mortgage market.
Other developed countries also support mortgage financing in similar ways to make housing affordable. Pakistan’s mortgage finance to Gross Domestic Product ratio is just 0.25%, among the lowest in the world. The average for South Asia 3.4%.
Land at Discount Rates
Land is a significant part of the cost of housing, particularly in or around big cities where land is highly appreciated. The government can help reduce this cost by offering land at discount for affordable housing. There are news reports that Pakistan government has identified tracts of land to offer it to builders at discount rates for affordable housing.
Summary:Naya Pakistan housing program offers Rs 33 billion in direct subsidies for down payments for the first 100,000 applicants and requires commercial banks to allocate 5% of their portfolio amounting to Rs330 billion for construction activities. It will boost Pakistan’s mortgage finance to GDP ratio which is only 0.25%, among the lowest in the world, and lower than 3.4% for South Asia. New housing drives a large number of sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances. These incentives are designed to stimulate the economy, boost employment and deal with the growing shortage of affordable housing in the country.
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