Governments normally do not have the financial resources to provide ready made houses to their citizens, but it is the endeavour of every welfare state to create an environment whereby construction and ownership of homes is facilitated.

At the same time, experience of countries having effectively developed housing finance systems shows that extensive provision of subsidy for house building has been an expensive, inefficient and self-defeating system.

In Pakistan every successive government has admitted the importance of housing as a key element for socio-economic development of the country, but housing continues to remain a low priority area on the misgiving that it does not contribute directly to economic growth in spite of forward and backward linkages with about 74 enterprises of the country.

The total current housing stock in Pakistan is valued at Rs1700 billion and comprises 21 million units of which only 22 per cent are pucca.(Pucca house is a housing unit that has durable solid walls or supporting structure together with a solid roof of reinforced brick or concrete.) The housing stock in urban areas in the year 2000 comprised 6.7 million units (3.1 million pucca). The House Building Finance Corporation (HBFC) has provided a total amount of Rs31 billion as mortgage loans until 31.12.2002 to over 154,000 net borrowers ever since it was set up in 1952.

Potential for housing finance is currently estimated at around Rs24 billion per year of which the component of mortgage finance is Rs15 billion while the component of micro-financing for housing is about Rs9 billion. Availability of housing finance from formal sector has rarely exceeded 1.5 per cent of the total investment in housing in any year. Current shortage of houses in the country is estimated at 5 million units. Shortage of pucca units in the country is estimated at 500,000 units, while shortage of pucca houses in the urban areas is estimated at 400,000 units.

Urban demand for houses is growing at the rate of 8 per cent. The demand for urban pucca houses for normal growth, replacement and upgrading etc is estimated at 155,000 units per year costing around Rs64 billion. The inadequacy of long-term funds for construction, purchase, and improvement of houses and the virtual non-availability of construction bridge finance, have greatly constrained the growth of housing stock in the country. In effect, people are unable to buy the housing unit they can afford - mainly because they can not obtain housing finance at a single digit mark-up.

The mark-up was 15 to 22 per cent, per annum until November 2002. It is therefore imperative that private sector may be inducted in land development under a more favourable environment. Home ownership in urban areas is about 70 per cent. It is estimated that more than 800,000 of urban pucca houses were rented out and fetched a rental of Rs1.25 billion per month in the year 2000. As more and more migration towards urban areas takes place, the problem of housing shall become more critical.

Most serious problem in the promotion and successful operation of housing finance companies has been and is the non-availability of adequate financial resources for providing loans.

In practice these finance companies have not even been allowed to mobilise long term savings exclusively for housing investment although this is one of the functions required to be performed by them under SRO 1356 of 1990.

No incentives have been allowed to encourage savings and home ownership by way of tax relief to depositors, borrowers or the lending institutions.

Both urban laws and institutions as well as financial infrastructure itself need very deep and extensive strengthening due to cumbersome, time consuming, complicated title documentation, court recovery, registration and mutation procedures. The result is that there is no specific housing finance institution in the private sector.

The government facilitated and encouraged SBP to organise a housing finance seminar in December 2002 of all the stakeholders concerned with housing finance particularly the commercial banks. A lot of enthusiasm was generated due to very high liquidity, steep fall in interest rates, and consequential high level of recovery of defaulted loans. The SBP took up an active part in loosening its traditional conservatism.The following steps were taken in this regard:

a) The SBP issued instructions to commercial banks to provide mortgage financing to the extent of Rs5 million for a period of 15 years;

b) banks are allowed to have an exposure under housing finance to the extent of 5 per cent of their net advances;

c) banks are allowed to develop floating rate products for housing loans;

d) HFCs allowed to float long term bonds for housing finance;

e) refinance window to be negotiated at floating rate of market rate to enhance liquidity;

f) HFCs and HBFC allowed to promote savings and micro loans from low-income groups through NGOs and examine feasibility of escrow accounting at floating market rate;

g) foreclosure laws are planned to be introduced but for eviction, intervention of court still can not be avoided.

Measures suggested: The entire infrastructure of housing finance has remained highly underdeveloped although some steps were taken half heartedly since 1990.The following measures need to be taken urgently:

a. The ministry of finance should announce that housing industry is a high priority sector in the market-based economy.

b. There is urgent need to establish an apex housing bank as in India, Thailand, Indonesia to license and regulate housing finance sector, provide liquidity to HFCs as lender of last resort; standardise documents, provide information on credit worthiness of both borrowers and lenders administer saving and loan accounts of HFCs.

c. Payment of withholding tax and Zakat on residential house should be exempted.

d. Entire mark up payable on housing loans and instalments upto Rs500,000 should be treated as deductible expense by income tax authorities.

e.To encourage deposits for housing, deposits kept for three years or more should be exempted from income tax like Pension Fund.

f. In view of requirements of investment capital for long period, HFCs may be allowed to create a special reserve of an amount equal to their paid-up capital, which should be exempted from payment of income tax.

g. Investment of insurance/ pension and provident funds should be allowed on TFCs and COIs of HFCs as they also represent long term investment like housing loans.

h. Foreclosure laws are still cumbersome, complicated, time consuming and expensive as jurisdiction of courts still remains when defaulters has to vacate the property or criminal proceedings are initiated on account of default of bad cheques.

i. Stamp duty on registration of property purchased with a housing loan of a registered finance company should not exceed one per cent of the value of property (This shall be basically for record and registration purposes).

j. The government and local bodies, should enact laws on the lines of Malaysia to protect the interest of local allottees in matters of delays, use of construction materials workmanship and investment by financing institution and clients.

k. Rent control laws need immediate revision to protect homeowners.

l. Title of documents of property should be simplified, computerised made available on demand.

The steps indicated above are necessary to make the housing industry vibrant and strong and to develop an environment capable of meeting needs of the people. In order to further vitalise the system it appears imperative that actions proposed above are monitored with a clear-cut strategy and following action taken:

a) Loans at less than 10 per cent per annum on floating rate basis should be ensured.

b) Housing finance be advanced at debt/equity ratio of 80:20 for a period of 15 to 20 years depending on the borrower’s capacity to pay.

c) Stamp duties and other charges should not be more than one per cent of loan.

d) There should be complete tax exemption of mark-up and instalments per annum on total loan of Rs500,000 and below.

e) Housing finance Window Fund of Rs450 million is lying undisbursed with the SBP since 1994. This dollar amount should be negotiated with USAID and advanced to HFCs at the current market rate or floating rate of the market. This would help in development of secondary capital market in mortgages.

f) Donar agencies, official and otherwise, such as the World Bank, ADB, USAID, European Union, Canada and Commonwealth, should be asked to provide funds for housing both market-based and social fund for poverty alleviation.

g) Mortgages with HBFC audited by the World Bank and local auditors should be securitised and marketed in secondary market of mortgages. This should generate resources for housing market.

h) Group funding without collaterals should be generated for very poor.

i) Foreclosure laws should be implemented without recourse to courts within 90 days.

j) Short listing, registration, monitoring of building companies based on Malaysian law, sharing of information and computerisation of data among HFCs should be undertaken. k) Special Prudential Regulation for HFCs should be ensured.