NationalVolume 14 Issue # 02

Neglect in the low cost sector

The issue of low cost housing is a long standing one but has not been taken seriously by any government. Land prices have gone so high that middle and low income people cannot dream of owning a house. In the last federal budget it was announced that the government would provide 0.5 million housing units to the low-income group. Under the programme, the government was to set up 1,000 residential colonies with 500 units each across the country. Over 50 million people were expected to benefit from the scheme. Each unit would cost Rs1 million and the government would take necessary steps to engage banks and other lending institutions to provide loans for these units. The government would pay the interest whereas the remaining amount would be paid by home buyers in instalments. Since the announcement no progress has been made towards putting the plan on the ground.


According to a recent survey, the country currently suffers from a shortage of nine million housing units, with the deficit growing by an estimated 0.7 million units per year. Worse still, Pakistan has one of the highest people-per-room ratios of 3.5 in the world.  According to the Chairman of Association of Builders and Developers, the situation is particularly alarming in the urban areas, where slums have become commonplace. About 12 percent of the population in the country owns 56 percent of the housing stock, leaving only 44 percent for the remaining 88 percent. Whatever construction activities are going on, they are focused on the rich and the super-rich, with only a few catering for the middle classes. Housing for the poor seems nobody’s concern.


One way to promote low cost housing is for the government to play the role of a facilitator by supplying land and providing credit to both developers and individuals and lowering transaction costs. The government can also initiate measures to upgrade infrastructure facilities and reduce transaction fees. One of the fundamental constraints to own a house is generally a lack of required funds, which could be generated either by raising own resources or borrowings from the banks. While mortgage finance is quite common in developed countries, Pakistani banks follow a restrictive policy in this regard.



The State Bank of Pakistan has taken a number of initiatives lately to solve the issue of housing for the poor. After announcing a Policy for Promotion of Low-Cost Housing Finance last month, the SBP has now taken the government and Pakistan Mortgage Refinance Company (PMRC) on board for provision of cheap financing to help solve the problem of the housing shortage. It may be recalled here that the central bank had earlier released a detailed study which highlighted the problems faced by the housing sector and suggested possible measures to solve the crisis with the initiation of housing finance policy. The SBP after releasing the report announced a policy to provide low-cost housing finance facility to borrowers in order to bridge the widening demand and supply gap in the housing sector.


The population is growing at an average rate of 2.4 per cent since 1998, and the annual demand for new homes is approximately increasing by 0.7 million a year whereas only about half of this demand is currently being met. Overall, the country is currently facing a housing shortage of about 10m units. A recent report said that outstanding housing finance volume from banks and the House Building Finance Corporation stands at around Rs 83 billion, equivalent to only 0.5 per cent of GDP, lower than that of India and Bangladesh. It may be added here that Pakistan Tehreek-i-Insaf, which has formed the new government, has already announced its plans to build 5m housing units across the country in its manifesto. The massive plan could create millions of jobs and impact at least 42 allied industries linked to the construction sector.


According to the SBP, the new policy has been formulated keeping in view international best practices and local market conditions. In order to facilitate this policy, the PMRC was formed in April this year to provide financing to banks so that the banks could provide long term loans for housing in the country. Shareholders Agreement of PMRC was signed in Karachi on 15 April, 2018, with the government (National Bank of Pakistan and ministry of finance) and private sector banks holding 49 per cent and 51 per cent stake in the Company.


The PMRC’s primary role will be to provide medium and long term liquidity to banks in order to help stimulate development in the sector. Furthermore, a Malaysian expert on housing was hired as CEO of the PMRC who identified the lack of long term liquidity to finance housing in Pakistan as one of the major impediments in the development of the housing sector in the country. The SBP earlier said that it would introduce a subsidized financing facility for low cost housing by providing liquidity to the financial institutions at subsidized rate.  SBP will provide refinance up to Rs1m or 50 per cent of loan amount at a rate of one per cent to banks or DFIs and the end borrower rate will be five per cent. The remaining 50 per cent of the loan or financing amount will be their own sources at a fixed rate of up to 12 per cent. Similar financing facility will also be provided through the Islamic Financial Institution which will go a long way to ease the housing shortage in the country.