Back in mid-April, at a ceremony to mark the transfer of 580 houses to former federal government employees, Federal Minister for Housing Tariq Bashir Cheema could not help himself. He simply had to go off-script.

The written talking points he had been given were the standard platitudinous fare: he was supposed to wax lyrical about how the government cares deeply for people who spent their entire lives in stable, permanent government jobs, enjoying full pensions, and who were about to be handed the keys to heavily-subsidised houses.

But Cheema, an old-school Pakistan Peoples Party (PPP) jiyala, once suspected of being in league with Murtaza Bhutto’s Al-Zulfikar outfit, is no shy guy. He just could not help himself. As he looked out at the faces of the beaming pensioners, he let slip a telling comment: “It took an entire decade to build 580 houses here. Given that my government has promised to build five million homes through the Naya Pakistan Housing Policy, the rate of delivery by the Pakistan Housing Authority (PHA) is a matter of grave concern.”

Grave concern, indeed.

The PHA, which was responsible for building those houses for retired federal government employees, is not to blame. At least, not entirely. Housing policy in Pakistan tends to be the same as all public policy: of the rich and privileged, by the rich and privileged, for the rich and privileged. The Naya Pakistan Housing Policy (NPHP), which is one of the most ambitious and laudable policy initiatives that any government has ever conceived, will struggle to break the mould. The only way to avoid utter failure for the NPHP is to engage in a substantial re-think of the manner in which the NPHP is being deployed, and a serious examination of who the NPHP is for, versus who is most likely to benefit from it.

Given the severe housing crisis in the country, the government’s housing initiative is both important and ambitious. But is it more rhetoric than practical? And what can be done to fix it?

Why is housing important?

The World Bank estimates that around 47 percent of urban households live in informal settlements (katchi abadis) with limited access to civic infrastructure and sanitary services. The immediate public health costs, and long-term social capital costs, of nearly half the city living in non-house homes are staggering. The total national housing deficit is estimated at over 10 million units, and this gap increases by 350,000 units every year with the incremental deficit expected to rise to 400,000 units per annum in the near future.

Improving the stock of housing is a meaningful mid-term instrument of macroeconomics. One estimate indicates that a 100,000 increase in housing units in a year in Karachi could drive growth in over 50 connected industries and contribute as much as 2.2 percent of the GDP to overall national output. Any increase in housing construction spurs growth right across the economy, including transportation, environmental services and the social sectors.

What is the PTI government trying to do?

The NPHP is not the country’s first experience with major public housing programs. From Karachi’s Korangi in the 1960s to the resettlement of katchi abadi residents (Hawke’s Bay) in the 2000s, major increases to the housing stock have been tried before. In 2010, the Government of Punjab launched the Ashiana Housing Scheme targeted at low- and middle-income buyers but delays in construction and balloting led to accusations of irregularity and eventually the arrests of those involved in the project.

Like all reformist political movements that sweep into power, the PTI is struggling to give real world granularity to its lofty goals. It originally committed to delivering five million housing units in five years.

As of June 2019, the government has about 50 months left in office. With zero houses built so far, it would need to construct about 100,000 each month from July 2019 till the next scheduled election in 2023.

On the evidence thus far, this target will not be met.

But what is more worrisome is that the inexperience of the government in conceiving, formulating, planning, delivering and monitoring very large and ambitious projects may render the genuine effort being invested in NPHP to be ineffective in tackling the spirit of the NPHP. This spirit — to insure Pakistani families and communities against the vagaries of a vastly underdeveloped, unequal and sometimes cruel housing market — cannot be met if the government’s efforts to deliver the targets of the NPHP only succeed in establishing greater choice for higher income groups in the country, whilst continuing to ignore the middle and lower income groups.

In short, even if five million houses are not delivered (and it is very unlikely that they will be), the NPHP can be successful if it can penetrate and alter the housing market to the advantage of middle and lower income Pakistanis.

What is the government’s housing policy?

The government’s housing policy is a combination of the NPHP and the State Bank of Pakistan’s “Policy for Promotion of Low-Cost Housing Finance.”

The NPHP is essentially supposed to serve as a policy framework that articulates and tackles the overall challenge, of substantially reducing Pakistan’s housing deficit. Of course, elected officials like Minister Cheema and his boss, Prime Minister Imran Khan, want results fast.

As a result, the NPHP has also become a parking lot where officials are trying to repackage and rebrand already existing housing schemes. This would be a perfectly legitimate thing to do if it weren’t for the foundational problem that NPHP was supposed to solve.

Existing housing schemes tend to be slush funds either (i) for interest groups, like the retired federal government employees, who use their access and privilege to secure subsidised land and housing, as in the case of the Kuri Housing Scheme in Islamabad or (ii) for resourceful real estate agencies and developers, who use their access and privilege to secure large tracts of land at throwaway prices, only to realise insanely high profits.

Among many factors that prevent safe and secure shelter for Pakistanis is the architecture of the existing real estate market — it is a market that actively excludes middle- and low-income groups, and extracts great profits from those who can afford to be fleeced. The promise of the NPHP is that it can substantially break the hold of this engineered market failure — in part, by delivering a massive number of new housing units to the market, and in part, by making access to these new units affordable and realistic for middle- and lower-income groups.

The SBP policy itself does not lack the right spirit. In a policy paper preceding the actual policy, the SBP had indicated its intent to make mortgages and financing low-income houses easier for both consumers themselves, and the banks and financial institutions that would provide the loans. It also indicated the SBP’s appetite to establish a refinancing facility for banks and financial institutions — both Islamic and conventional — to facilitate long-term affordable funding for special segments. Under this facility, up to 100 percent of housing finance extended to special segments would be refinanced by the SBP. Special segments include widows, children of martyrs, special persons, transgenders and persons in areas severely affected by terrorism.

The eventual SBP policy lives up to this promise through two notable policy measures. The first is subsidised rates for the otherwise underserved potential consumers that it refers to as the special segment. The second is a substantial reduction in the general reserve requirements for banks that establish measurable and viable low-income housing financing departments or programmes. The overall thrust of the SBP policy is to subsidise mortgages so that housing is made affordable for low-income groups. In all, the equity credentials of the SBP policy are impressive.

Unfortunately, the existing combination of the government approach through NPHP and the SBP policy for low-cost housing have three significant flaws that will make the achievement of the policy outcome that PTI is seeking through NPHP, very, very difficult.

Three critical challenges

The first killer flaw baked into any housing policy for Pakistan is the absence of a viable housing finance or mortgage sector.

The cost of building a house is prohibitive, across all classes outside of the rarefied world of the Pakistani elite. In most countries that have managed to avoid the kind of housing deficit that Pakistan has, the driver of housing growth is a viable mortgage sector — in short, the ability of ordinary people, of ordinary means, to walk into banks and have a range of options that allow them to borrow money to buy or build a house.

Mortgage finance in Pakistan is virtually non-existent. Pakistan’s mortgage finance-to-GDP ratio (referred to as mortgage depth) is at 0.23 percent — the lowest in South Asia. It is three percent for Bangladesh and seven percent for India.

As of 2018, the total number of housing loans outstanding was less than 70,000 mortgages, with a total outstanding loan balance of only 83 billion rupees and a tenor of 13 years. Only 1,500 new mortgage loans are extended every year with the average loan size in 2016 being 6.1 million rupees and an average loan-to-value (LTV) ratio of 48 percent, forcing the borrowers to arrange the remaining 52 percent of the price from their own savings.

Not only is the current mortgage finance market in Pakistan very small, but it also only caters to the highest end of the high-income group in the country. Again, of the rich and privileged, by the rich and privileged, for the rich and privileged.

The second killer flaw, which also flows from the first, is the twin threat of the absence of affordability for middle- and low-income Pakistanis on the one hand, and the ineligibility of such Pakistanis to be able to access mortgages, on the other.

The prevailing average price of land is estimated to be 3,379 rupees per square foot, and the cost of construction is estimated at roughly 1,250 rupees per square foot for grey construction — which is the term used for an otherwise fully constructed, basic house, that lacks any fixtures or switches or other bells and whistles that make a house liveable. This makes the sticker prices for such an unfinished 80 square-yard, single-storey house around 3.3 million rupees. Outright purchase at this price point is beyond the reach of the vast majority of Pakistan’s population. It is certainly well outside the budgets of the poor and vulnerable in the country.

The driver of housing growth is a viable mortgage sector — in short, the ability of ordinary people, of ordinary means, to walk into banks and have a range of options that allow them to borrow money to buy or build a house.

Table 2 shows Pakistan’s average monthly household income distribution as well as estimates of a sustainable housing finance monthly instalment for each income group or quintile assuming a 33 percent debt burden.

Using the advertised prices of NPHP Phase I housing projects announced for Lodhran, Chishtian and Renala Khurd, the monthly instalments of the various tiers of housing units offered are summarised in Table 3.

It is clear that lower-income segments (on average) will not be able to afford the announced housing units under NPHP given the insufficiency of their income levels to support the required mortgage servicing — even at our reduced debt servicing assumption of 33 percent

An affordability analysis for housing unit values by each income group or quintile is presented in Table 4. This is calculated by estimating the total value of a housing unit that can be supported by a given income group or quintile’s income with the proposed financing rate and varying tenors assuming a 33 percent debt burden.

This analysis further highlights the affordability gap. The NPHP housing products launched to date are beyond the reach of 80 percent of all Pakistanis, even if the term of financing is nearly doubled from the currently mandated 12.5 years to the more common 20 years allowing financing of a higher value housing unit. This analysis does not cover special segments for now.

Approximately 68 percent of the urban working population is employed in the informal sector of the economy without a verifiable or steady source of income. Both the SBP Policy and the NPHP are targeting borrowers earning less than 60,000 rupees.

The NPHP even allows the income of all family members of the borrower household to be clubbed to calculate the mortgage amount. If the combined household income still classifies the family as a low-income group, there is a high likelihood that all of the earners are part of the informal economy. Commercial banks decide on extending a mortgage loan after assessing the borrower’s repayment capacity.

Repayment capacity is calculated by verifying the borrower’s income history, future income potential and net worth. Unfortunately, a low-income borrower working in the informal sector will not be able to provide the income history, future income potential and net worth to the satisfaction of the bank to qualify.

In certain circumstances, banks do qualify a borrower for mortgage by considering the value of the housing unit. However, as shown above, such units will not help the borrower qualify for mortgage.

The third flaw in the current government policy framework is that the NPHP envisages non-high-rise units to be the core of the initiative, with three million of the five million units to be either single-storey homes, or ground-plus-three floors, or additions to existing houses.

High-rise units comprise only 425,000 of the total units (or less than nine percent of the total). The problem with non-high-rise housing units is that they require vast tracts of land. Pakistan has plenty of land but urban centres, where the jobs tend to be, also tend to be highly dense, with highly contested land, if any is ever available. Large tracts of land for massive new housing schemes that may achieve the NPHP targets would necessarily be far away from city centres.

The NPHP scheme for Lodhran is one example of potentially many, with demand for new houses in the NPHP scheme for Lodhran reportedly very low, given both how far it is from the heart of Lodhran city, and how much more cheaply land can be secured just outsides the boundaries of the NPHP scheme there.

When housing schemes are located at longer distances from employment opportunities and public services, the transportation costs for those home owners increase and this adds to the total cost of ownership for new home owners (and likely borrowers that have already had to secure a mortgage). Distances from urban centres do not get reflected in debt burdens but they strain the disposable income of borrowers — especially any potential owners of new homes that happen to belong to the middle- or low-income groups that need to be an important target for the NPHP.

How to fix the NPHP

A number of significant reforms are required to tackle both the scale of the housing crisis in Pakistan, and the specific nature of the manner in which this crisis hurts the middle and lower-income segments of the country. Urban planning reform is among the most obvious of policy areas that merit attention. One of the tools to tackle the inequality aspect of housing crises in other countries has been Affordable Housing Obligations (AHOs) — in which builders and developers are legally obligated to ensure a minimum percentage of residential units classified as low-cost in all new high-rise construction. AHOs have the effect of creating low-cost housing stock in every new building, while at the same time not concentrating poverty in any particular building or area.

Another vitally important area that demands policy attention is land records. Land record management information systems (LRMIS) help maintain real-time digital records of all properties, their ownership history as well as charges/liens registered by lenders over them.

While provincial LRMIS systems have done a great job in digitising land records, their efficacy and applicability for NPHP will have to be assessed carefully. The National Database Regulatory Authority (NADRA) and the Central Depository Company (CDC) can be utilised in this regard, but it took NADRA five months to enter the half million applications submitted to the government for NPHP registration. The intent-capacity gap for NPHP is best crystallised by this mere fact. A government needing to build 100,000 houses per month is taking five months not to build 500,000 houses, but to register the applications of 500,000 potential house owners.

Perhaps most importantly, the government needs to devise new mortgage instruments that address both the mortgage market and the affordability challenge. We have proposed a modification to the SBP policy in the shape of a shared equity mortgage (SEM) structure. The most important outcome of adopting the SEM based mortgage financing model we have designed, would be the expansion of affordability to almost 60 percent of the population, or the top three income quintiles (up from the current highest 20 percent).

There are a range of other important policy considerations that will be necessary, and that have the potential for transformative change to the housing market. These include the capacity for credit appraisal in the financial sector, and the potential establishment and growth of credit bureaus.

Housing insurance, at the front end, and risk appraisal and management for the banking and finance sectors at the back end, can be important indicators of the success of a housing policy. Good public policy in the housing sector must also tackle the scourge of speculation — discouraging malign market behaviour with strong legislation and even stronger enforcement. There are also fiscal implications in any good housing policy, with improved land records, and an expanded mortgage sector offering tax authorities much more detailed information on who owns what and how.

All in all, the Naya Pakistan Housing Policy is a remarkably ambitious policy gambit. It offers Pakistan a genuine opening for economic growth, and improved equality. Unfortunately, a lack of experience and preparation risk undermining the good intentions of those that conceived of the NPHP. Rent-seekers, elite interests and the special interest groups that prevent growth and development in other areas actively threaten housing policy, too.

To avoid the NPHP from being of the rich and privileged, by the rich and privileged, for the rich and privileged, the government must pay much greater attention to the design of low-cost housing finance at the State Bank; it must ensure that a much more substantial share of the NPHP houses are high rise units that are designed to tackle both equity issues, as well as access issues of access to urban centres. Most of all, the government must carefully examine the income profile of those that are first in line for new houses and prevent the crowding out of the poor and the middle-income groups in the country.

This article is based on Tabadlab’s Working Paper 01 Optimizing the Naya Pakistan Housing Policy and Working Paper 02 Mortgage Market Design for Low- Cost Housing Units in Pakistan. Both can be downloaded from http://www.tabadlab.com

Ibrahim Khalil is a real estate project financing specialist for residential real estate construction at one of the premier real estate companies in Canada. He has worked in real estate investing and management in the US, the UK and France.

Umar Nadeem is a Fellow at Tabadlab, focusing on public policy and governance. He works on regional connectivity, digital governance and service delivery analytics. He has advised governments and international financial instituons in Asia, Europe and Africa.

Published in Dawn, EOS, June 9th, 2019