Housing finance

Every human being wants to have a roof over his head to protect himself from the vagaries of nature but a large number of people are not lucky enough to possess this basic necessity of life. One of the fundamental constraints to own a housing unit is generally a lack of the required funds, which could be generated through raising own resources or borrowings from the banks. While provision of housing loans through mortgages is quite common in developed countries, Pakistani banks have been quite reluctant to extend such a facility to their customers, with the result that only about 1.5 percent of the private sector credit is invested in the construction sector at present. However, according to the latest “Quarterly Housing Finance Review” released by the SBP, housing finance portfolio during the quarter ended December, 2014 has gained some upward momentum, with Rs 3.43 billion fresh disbursements among 937 borrowers to reach an outstanding level of Rs 53.7 billion. House Building Finance Corporation Limited (HBFCL), being the largest player in the housing finance market, accounted for 57.61 percent of the new borrowers, contributing 22.71 percent of the new disbursements equivalent to Rs 772 million. Islamic banks also remained active in extending housing finance and disbursed Rs 1.9 billion while conventional banks remained largely inactive in the field. Of the gross outstanding amount as of December 31, 2014, commercial banks accounted for Rs 40.8 billion – private banks (Rs 19.6 billion), Islamic banks (Rs 15.3 billion), public sector banks (Rs 6.0 billion) and foreign banks (Rs 0.3 billion). Aggregate loans of HBFCL were Rs 12.7 billion, up by 3.25 percent over the last year, while other DFIs had a meager share of Rs 0.1 billion in outstanding loans.

Although the rise in housing finance during the quarter ended 31st December, 2014 would appear to be quite encouraging in percentage terms, the outstanding amount extended to this sector is too small to make much difference on the overall situation in this important sector, especially when there is already a huge backlog of housing units and population of the country is increasing rapidly, widening the gulf between supply and demand every year. The pent-up demand of housing units and mushroom growth of shanty towns in urban centres would, of course, increase the frustration level among the masses and breed chaotic conditions in the country. The reluctance of banks to help the country in this area could be gauged from the fact that while construction sector and housing services (ownership of dwellings) account for 2.4 percent and 6.8 percent of GDP, respectively, advances extended to the construction sector were only around 1.5 percent of the total private sector credit. These meagre amount of advances are not helping the cause of the poor, nor are enough to be gainfully invested in enhanced construction of housing units. For instance, banks are mainly focusing on high-end customers and are hesitant to lend outside few big cities. Besides, major chunk of advances is granted for the “outright purchase” category as 61.40 percent of the total outstanding loans against housing were utilised to purchase houses while “construction” and “renovation” accounted for 27.56 percent and 11 percent of the total loans respectively.

All of this suggests that primary housing finance market, contrary to most other countries, is yet at a nascent stage and needs to be developed urgently by creating an enabling environment to avoid a crisis situation in the country. In particular, there is a need to increase primary mortgage market by extending services to the poor and low-income segments of the society. For such a noble and productive task to be undertaken, a host of obstacles have to be removed to encourage the banks to actively participate in the housing finance business. Reasons for sluggishness in the growth of mortgage market and services are, of course, numerous, ranging from difficulties related to foreclosure laws and clear title issues. The growth is also hampered by ineffective institutional framework, absence of secondary mortgage market, high transaction costs and unorganised real estate sector. In our view, two crucial issues which need to be addressed urgently pertain to the clear title of lands for housing development and the behaviour of the banks towards risk taking. No financial institution could be expected to aggressively lend to the housing sector in case there is uncertainty about the land titles and the possibility of legal wranglings to establish the ownership of property and recover loans. Secondly, banks have to be distanced from their comfort zone of putting most of their assets in government securities by reducing overall fiscal deficit and providing sufficient incentives for the grant of loans for construction of low-cost housing. It would also help if the government could shift its emphasis from the building of imposing projects, catering mainly to the rich, to the provision of much needed basic facilities essential for the sustenance of the poor. The setting up of Pakistan Mortgage Refinance Company could increase accessibility and availability of affordable housing finance to a certain extent provided sufficient funds are made available and impediments to housing finance are removed to the satisfaction of banks and DFIs.