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Five million in five years
With much fanfare – albeit with austerity too – Prime Minister Imran Khan announced his intention of building five million new homes in Pakistan. I say ‘austerity’ here because his plan really was austere and parsimonious in its details.
The PM said that he would mobilise the private sector to build the houses, conduct surveys to ascertain the demand, had instructed the Ministry of Finance to propose a financing plan, and was setting up a new office within the PM Secretariat to facilitate people. All of this of course means that, while PM Khan has good intentions and wants to build five million homes, so far there is no plan.
The only concrete numbers shared so far with the public have been by the prime minister’s friend and confidante Aneel Musarrat. The Pakistani-origin British real-estate developer has said that the government will provide land free of cost and that the total cost of building these houses will be $180 billion. That’s Rs24,300 billion. In his plan, the cheapest home was to be built for $10,000 and the most expensive one for $100,000. On the other hand, Tariq Bashir Cheema, the federal minister for housing, says that the most expensive home should not be for more than Rs2.5 million. So quite obviously there are still a lot of loose ends in the plan and nothing has been set in concrete yet.
Yet another spokesman of the government says that the cheapest house will be for Rs1.5 million, for which the homeowner will be expected to pay Rs150,000 as down payment and the rest will come from a bank loan. Given 10 percent interest rates and 20 years payback, the equal monthly payment for this mortgage will come to around Rs13,000. This is again a little confusing as the form that the government is selling for Rs250 each as part of its housing demand survey says that the minimum income required for getting a house is Rs20,000 per month and the minimum monthly payment required will be Rs6,000. And yet the cheapest mortgage comes to Rs13,000 which will be 65 percent of the income for a household that makes Rs20,000 a month. The only way to bring monthly payment to Rs6000 per month is to charge 0.65 percent interest per year, which is to say that the government will essentially give homeowners 20-year loans interest free.
The State Bank of Pakistan’s policy rate today stands at 8.5 percent, having increased by 200 basis points over the last four months; and most economists think that the rates will probably be increased by another 300 basis points as the government tries to slow down the economy to bring about a reduction in imports. This of course means that even a 10 percent mortgage rate can only be done through a government subsidy to private banks and that is something the government hasn’t budgeted for in its mini budget. Plus the amounts we are talking about are so large that even a much larger and richer economy cannot afford to undertake such a huge project, let alone a poor country like Pakistan.
Consider the amount required for building all the homes again: Rs24,300 billion over five years. This means Rs4860 billion per year. This is more than the total taxes the FBR is expected to raise this year. This is also more than the sum of the private and foreign investment undertaken in Pakistan every year. In other words, if all the money Pakistanis invest to open shops, restaurants, malls, factories, power plants, schools, colleges, clinics, hospitals, stores, butcher shops, bakeries, hair salons, tuition centres, banks, trucking companies and so on and so forth, were diverted to build homes even then this won’t be enough. So five million homes in five years is a lovely dream but it’s just that: a dream.
One more statistic to show the implausibility of this dream and then I shall endeavour to make some suggestions. The proposed five million homes are more than all the ‘pucca’ homes in the cities of Karachi and Lahore. So the PTI is promising to build in five years more houses than exist in Lahore and Karachi. I am tempted to say that the PTI wants to build more houses in the next five years than have been built in the 70 years since independence. But the fact is that there are houses in Lahore that were built during Ranjeet Singh’s time and homes in Karachi include Wazir Mansion, the birthplace of our Quaid.
This reality check aside, the fundamental idea of PM Khan to enable the private sector to build affordable homes is a great idea and something that can fulfil a great need as well as boost the economy. So let us look at what is it that prevents more affordable homes to be built. I think the primary hindrance is the non-availability of affordable land near people’s workplaces. Add to that the complexity of finding land with proper documentation. And of course our anti-growth zoning laws and the red tape and harassment involved in getting building permits also add hugely to the cost. And finally, getting water, electricity, gas and sewerage connection is no easy feat in Pakistan.
All told our laws, regulations, historic legacy about land-holding, bureaucratic inertia and venality and inadequate utility infrastructure all contribute to the lack of affordable housing. Given our federalist government structure, almost all of these are the responsibilities of the provinces. The governing structure in Sindh and Balochistan are especially a challenge. It is not clear to me how a PTI federal government fixes these issues while respecting provincial autonomy.
The government is keen to give free land to developers for affordable housing. But governments don’t own much land near city centres and faraway homes are not practical for many low-income people.
In view of all this, one of the best things the federal government can do is to work with provinces and – where possible – give titles to residents of katchi abadis. Once people have title to the land, they will over time build decent houses for themselves.
The second major step, something the PML-N government had started doing in Punjab, is to make land use laws and regulations rational and people friendly. Dr Nadeem ul Haque, the former deputy chairman of the planning commission, has been arguing for years that allowing tall buildings everywhere in the city will allow not only result in cheaper residences but will also give a huge boost to the economy.
To incentivise builders to build homes by giving them free land and forcing banks through the State Bank of Pakistan to lend to new affordable homes will create the mother of all bad debts. This is a pitfall the government must avoid. Working slowly to improve laws and regulations, something which doesn’t attract much publicity on the media, is probably the way to go about when bringing homes in the reach of more low-income citizens.
With much fanfare – albeit with austerity too – Prime Minister Imran Khan announced his intention of building five million new homes in Pakistan. I say ‘austerity’ here because his plan really was austere and parsimonious in its details.
The PM said that he would mobilise the private sector to build the houses, conduct surveys to ascertain the demand, had instructed the Ministry of Finance to propose a financing plan, and was setting up a new office within the PM Secretariat to facilitate people. All of this of course means that, while PM Khan has good intentions and wants to build five million homes, so far there is no plan.
The only concrete numbers shared so far with the public have been by the prime minister’s friend and confidante Aneel Musarrat. The Pakistani-origin British real-estate developer has said that the government will provide land free of cost and that the total cost of building these houses will be $180 billion. That’s Rs24,300 billion. In his plan, the cheapest home was to be built for $10,000 and the most expensive one for $100,000. On the other hand, Tariq Bashir Cheema, the federal minister for housing, says that the most expensive home should not be for more than Rs2.5 million. So quite obviously there are still a lot of loose ends in the plan and nothing has been set in concrete yet.
Yet another spokesman of the government says that the cheapest house will be for Rs1.5 million, for which the homeowner will be expected to pay Rs150,000 as down payment and the rest will come from a bank loan. Given 10 percent interest rates and 20 years payback, the equal monthly payment for this mortgage will come to around Rs13,000. This is again a little confusing as the form that the government is selling for Rs250 each as part of its housing demand survey says that the minimum income required for getting a house is Rs20,000 per month and the minimum monthly payment required will be Rs6,000. And yet the cheapest mortgage comes to Rs13,000 which will be 65 percent of the income for a household that makes Rs20,000 a month. The only way to bring monthly payment to Rs6000 per month is to charge 0.65 percent interest per year, which is to say that the government will essentially give homeowners 20-year loans interest free.
The State Bank of Pakistan’s policy rate today stands at 8.5 percent, having increased by 200 basis points over the last four months; and most economists think that the rates will probably be increased by another 300 basis points as the government tries to slow down the economy to bring about a reduction in imports. This of course means that even a 10 percent mortgage rate can only be done through a government subsidy to private banks and that is something the government hasn’t budgeted for in its mini budget. Plus the amounts we are talking about are so large that even a much larger and richer economy cannot afford to undertake such a huge project, let alone a poor country like Pakistan.
Consider the amount required for building all the homes again: Rs24,300 billion over five years. This means Rs4860 billion per year. This is more than the total taxes the FBR is expected to raise this year. This is also more than the sum of the private and foreign investment undertaken in Pakistan every year. In other words, if all the money Pakistanis invest to open shops, restaurants, malls, factories, power plants, schools, colleges, clinics, hospitals, stores, butcher shops, bakeries, hair salons, tuition centres, banks, trucking companies and so on and so forth, were diverted to build homes even then this won’t be enough. So five million homes in five years is a lovely dream but it’s just that: a dream.
One more statistic to show the implausibility of this dream and then I shall endeavour to make some suggestions. The proposed five million homes are more than all the ‘pucca’ homes in the cities of Karachi and Lahore. So the PTI is promising to build in five years more houses than exist in Lahore and Karachi. I am tempted to say that the PTI wants to build more houses in the next five years than have been built in the 70 years since independence. But the fact is that there are houses in Lahore that were built during Ranjeet Singh’s time and homes in Karachi include Wazir Mansion, the birthplace of our Quaid.
This reality check aside, the fundamental idea of PM Khan to enable the private sector to build affordable homes is a great idea and something that can fulfil a great need as well as boost the economy. So let us look at what is it that prevents more affordable homes to be built. I think the primary hindrance is the non-availability of affordable land near people’s workplaces. Add to that the complexity of finding land with proper documentation. And of course our anti-growth zoning laws and the red tape and harassment involved in getting building permits also add hugely to the cost. And finally, getting water, electricity, gas and sewerage connection is no easy feat in Pakistan.
All told our laws, regulations, historic legacy about land-holding, bureaucratic inertia and venality and inadequate utility infrastructure all contribute to the lack of affordable housing. Given our federalist government structure, almost all of these are the responsibilities of the provinces. The governing structure in Sindh and Balochistan are especially a challenge. It is not clear to me how a PTI federal government fixes these issues while respecting provincial autonomy.
The government is keen to give free land to developers for affordable housing. But governments don’t own much land near city centres and faraway homes are not practical for many low-income people.
In view of all this, one of the best things the federal government can do is to work with provinces and – where possible – give titles to residents of katchi abadis. Once people have title to the land, they will over time build decent houses for themselves.
The second major step, something the PML-N government had started doing in Punjab, is to make land use laws and regulations rational and people friendly. Dr Nadeem ul Haque, the former deputy chairman of the planning commission, has been arguing for years that allowing tall buildings everywhere in the city will allow not only result in cheaper residences but will also give a huge boost to the economy.
To incentivise builders to build homes by giving them free land and forcing banks through the State Bank of Pakistan to lend to new affordable homes will create the mother of all bad debts. This is a pitfall the government must avoid. Working slowly to improve laws and regulations, something which doesn’t attract much publicity on the media, is probably the way to go about when bringing homes in the reach of more low-income citizens.
