Affordable housing has always been a big issue in Pakistan. Housing is a fundamental need to ensure a minimum standard of living for a family unit. Housing has been recognized as a human right through the Universal Declaration of Human Rights and its reaffirmation at the 1996 UN Habitat Conference through the “Adequate Shelter for All” slogan. But the indicators on Pakistani housing paint a dire picture. There is a yawning demand-supply gap of over 10 million houses that grows at the rate of 400,000 annually.

A report prepared by SBP shows that the housing finance-to-GDP ratio in Pakistan was 0.7 per cent, which touched its peak at 1pc in 2005. This is the lowest ratio around the world, and also in the region with India standing at around 7.8pc. The report said that in case Pakistan targeted to achieve a share of mortgage debt to the country’s GDP at say 5pc within the next four years, the financial market would need Rs450 to Rs500bn as long-term funds supported the target. On an average, about 2.5pc of the conventional commercial banks total advances is mortgage finance, with an average tenor of about 10 years. The average retention of mortgage loan is about 12 years. The entire mortgage portfolio is funded by short-term deposits, creating a severe tenor mismatch. Commercial development covers a fraction of the annual demand that merely papers over the chasm and points to an alarming market failure. The inadequate supply in the sector has created a burden on existing housing stock resulting in quality deterioration, haphazard expansion and perpetuation of slums.

The government tried to formulate a national level, cohesive policy to address the myriad challenges associated with the sector through the National Housing Policy 2001 document, later revised in 2013 to reflect the government’s shift in preference towards provision through the free market and empowerment of sector stakeholders. In 2007, the Central Bank supervised the report authored by the Housing Advisory Group (HAG) that articulated a set of ten challenges and proposed recommendations and an action plan against each. The major issues to this day still range from weak enforcement of foreclosure laws, lack of standardization in land titling, onerous stamp duties, availability of low cost housing, and access to finance.

HAG’s only action point that has seen some progress is the establishment of the Pakistan Mortgage Refinance Company (PMRC) to increase access to finance to the housing sector. PMRC will provide long term loans at a fixed rate to banks, who will in turn pass this on to customers at the retail level. A combination of a fixed rate mark-up over a long tenure (e.g. more than 10 years) would not only result in improved affordability through a lower monthly instalment and higher eligible loan amount for the end customer but also a lower risk stemming from a floating interest rate. In the region, India, Egypt, Malaysia and Jordan have well established secondary mortgage markets and have a thriving mortgage industry.

As things stand today, the banks take risk as they provide long-term housing loans while they have short-term deposits. Most of the deposits in the banks are meant for less than one year which is the main hurdle for long-term loans. At present, the PMRC has Rs6bn funds with Rs1.2bn contributed by the federal government and the rest was contributed by nine commercial banks. Reportedly, the PMRC is also in contact with the International Finance Corporation (IFC) and Asian Development Bank (ADB) to get support for the mortgage housing development.

The introduction of the PMRC to the housing finance landscape would certainly provide an uplift to the financial industry. The sector’s loan book comprises of a paltry 65,830 loans for a total outstanding amount of PKR 65 billion down from PKR 89 billion 10 years ago. For some context, just the incremental demand from low-income housing is in excess of a trillion rupees. Further, the government sponsored House Building Finance Company (HBFC) that provides smaller loans targeted at the low-income segment is marred by operational and financial inefficiencies, chiefly, a high delinquency ratio.

While the PMRC will add institutional robustness to the sector, there is a need to address other related issues such as foreclosure and land titling. In the absence of concrete measures, banks will continue to lend to a segment of the population that is a) salaried and upper-middle income and b) intends to purchase property in high income neighborhoods in urban areas. Aside from banks, builders are also reluctant to go down market and tap into low-income segments, except for ad-hoc initiatives, most of which are politically or philanthropically motivated. This area is a vacuum that is marked by lack of demand-side segmentation and appropriate product offering is a noteworthy market failure.

It is essential that provision of low-income housing functions through the free market where the private sector entities take a lead through commercial incentives with the government interjecting to fill the vacuum through regulation and subsidies. It is for this reason that housing sector policies should not only take into account the financial needs of the final consumer but also the intricacies around builder finance.  Lately, banks and financial institutions in Pakistan are taking interest in mortgage finance. The SBP’s Quarterly Housing Finance Review has revealed that the housing finance is continuously increasing and posted a healthy growth of some Rs 4.9 billion during the first half of the last calendar year. With the current surge, the overall housing finance portfolio of all banks and DFIs reached Rs 65.70 billion in June 2016 compared to Rs 60.80 billion in December 2015, showing an increase of 8 percent.

It may be added here that HBFCL remains the largest shareholder in the house financing sector. However, based on category, Islamic banks remain the largest players with 38 percent share in gross outstanding. Overall Islamic and private banks are major contributors to gross outstanding of housing finance. The share of private banks and Islamic banks (IBs) in the gross outstanding stood at 30 percent and 38 percent, respectively, as on June 30, 2017. Fourteen Islamic banking divisions (IBDs) and five IBs have 12 percent and 88 percent share, respectively, in housing finance portfolio of the Islamic banking industry. There is also a thriving micro-finance industry that is well poised to provide loans for staggered construction or home renovation. But the true potential of this industry is yet to be fully tested.