After a brief period of robust growth, senior bankers say, the progress and expansion of the country’s nascent primary mortgage finance market is being retarded by a number of factors ranging from the lack of documentation of the national economy to the higher price of the bank credit and land to the recent murky political scene.

The pace at which the mortgage market has been growing in the recent years is feared to decelerate during the current fiscal as well as over the next few years unless impediments holding back its growth are removed and issues facing the banks and intending borrowers addressed.

The primary mortgage finance market got its first real push in 2004 when the government announced a range of fiscal incentives to the housing sector as part of its policy to encourage and increase consumer spending in general and give an impetus to the construction industry in particular. The incentives were also aimed at attracting commercial banks into financing the housing sector, which, in the past, had solely remained the job of the state-owned House Building Finance Corporation (HBFC).

The incentive package, say the bankers looking after the housing finance divisions of their respective banks, for the first time liberalised the credit regime for housing finance, rationalised stamp duties, registration fee and property taxes, and ensured that recovery procedures in case of default by the mortgagors are implemented.

The package raised tax credit on borrowing cost of housing loans to Rs500,000 or 40 per cent of the income of the mortgagor, increased the limit of property income for withholding tax to Rs200,000, reduced the rate of withholding tax on property income to five per cent, allowed deduction of profit or interest on financing of property for the purpose of income tax, and withdrew or slashed Central Excise Duty (CED) on construction materials like wires and cables and cement (CED on cement was cut by 25 per cent) with a view to bringing down the construction cost.

The banks’ exposure to housing finance was also increased to 10 per cent of their net advances and the maximum size of a mortgage loan was raised to Rs7.5 million with a debt equity ratio of 80:20 for a period extended up to 20 years. The response of the banks to these incentives was quite substantial. The banks — flushed with liquidity as a result of the reduced demand for credit from the government and the increased inflow of the workers’ remittances in the aftermath of the September 11, 2001 events. The interest rates had dropped down to their historic lows. The reduced credit cost did squeeze the banks’ margins, but at the same time afforded the bankers the opportunity to make higher profits through consumer lending, especially in the housing and automobile sectors, than through project/corporate lending.

“Low interest rates encouraged a lot of people to obtain housing finance and construct their own house. The low rates ensured that loan repayment cost the borrowers less than they were paying as their monthly house rentals,” says an executive, who asked not to be identified, working for a private bank in Lahore.

Housing finance increased by 24 per cent in 2004 on the back of the new fiscal incentives and 56 per cent in 2005 to slip back to about 28 per cent in 2007. The growth rate, the bankers say, has declined because of the rising interest rates — average housing finance price has risen to 13-14 per cent from 7-8 per cent in less than three years.

Compared to other regional economies, Pakistan’s primary mortgage market remains extremely small both as ratio of the national GDP and in absolute terms. This is despite the fact that the size of the mortgage market in the country has grown considerably during the last four to five years and the commercial banks’ exposure in this segment has risen to around Rs65-70 billion (this is exclusive of the HBFC’s exposure of Rs25-30 billion) — or one per cent the GDP. “This is extremely low if compared to India where the housing finance is above three per cent and China where it forms over 15 per cent of the GDP. If we look at the United States, the mortgage financing forms 70 per cent or even more of its domestic wealth,” said the banker.

“The coverage of the housing finance is also limited to a maximum of 16 cities across the country, and that too by just one bank. The rest of the banks are offering mortgage products only in six to eight cities. I can assure you no bank offers this facility in rural areas where 70 per cent of the total population lives,” the banker says.

The bankers say the government wants to push the housing finance to three per cent of the GDP by 2010 – as suggested by the World Bank, so that this segment of consumer lending acquires ‘critical mass’ and the national housing deficit of six to seven million units is narrowed. “But the odds against the expansion of the market are so huge that this target is unlikely to be attained over next several years unless the government responds to the banks’ proposals and addresses fundamental issues facing them in widening their mortgage operations.

The bankers say the major structural impediments in the way of the mortgage market’s expansion include the failure of the provincial governments to computerise their land revenue records and ensure clean titles, absence of uniformity in the land/property documentation procedures and weak enforcement of the foreclosure laws.

“The bankers are also very reluctant in advancing housing loans because most of the intending borrowers – individuals or developers, are not documented properly and are seldom in possession of their complete financial record and credit history. In order to evade taxes, most buyers do not document their actual incomes and when they come to us for financing we cannot help them because their declared income does not match their financing requirements,” says another banker.

There also exists a strong bias among the potential borrowers against instalment purchase. Many people who want early home ownership don’t apply for housing loans because of cumbersome documentation involved. “The customers are also not fully informed by the banks about their mortgage products. The customers, for example, applying for housing finance are usually not aware of the price of the credit or hidden costs. They also rarely know what kind of documents they need for obtaining financing for a built property or new construction.

Pakistan’s mortgage market remains substantially lower than even the regional economies both as percentage of their respective GDPs as well as in absolute terms if the size of those economies is taken into account,” the banker says.

Housing finance is considered an important mechanism to lift construction activity and boost some 40 allied industries for boosting industrial activity in any economy. “If the government wishes to expand housing finance , it has to take both short-term and long-term measures. In the short-term the government must take steps to reduce interest rates on housing finance to seven to eight person and freeze it for 10 years so that the middle classes, who are actually in need of early home ownership, can borrow and build or buy housing units for them.

Second, the government must free its land in various parts of the country and provide it to the builders/developers under the supervision of commercial banks for constructing housing units. The provision of the state land at cheaper rates or free of cost will help the developers discount the prices of the built units and make it affordable for the middle classes,” the banker says.

The long-term measures will include property reforms, uniform and quick implementation of recovery laws and procedures, and documentation of the economy and individuals. “Unless the government takes these measures, it should forget pushing the size of the mortgage finance to the targeted three per cent of the GDP. That would also mean that fewer people will have a roof their own than can be provided over the next several years,” the banker says.