Prime Minister Imran Khan last week launched the Naya Pakistan Housing Project (NPHP) with 18,500 houses and apartments for the low-income group in Islamabad. The land for the scheme has been provided by a major private developer who will also build 10,000 units through its pocket. The cost of the 223 acre land will be reimbursed to the developer after the sale of the houses.

The government plans to build five million affordable housing units for the lower to middle income groups during its term in power. It will assist potential buyers by providing subsidised mortgage loans through commercial banks and the state-owned mortgage company that has partnered with the Pakistan Mortgage Refinance Company (PMRC).

The PMRC, a public-private partnership established by the central bank to accelerate mortgage financing, has secured a $140m credit line from the World Bank to fill the housing supply gap estimated to be 10m units.

‘A better way to reduce the growing housing gap is to give tax advantages and other incentives to builders and developers. The government may continue its NPHP initiative alongside’

The NPHP plan envisages the construction of houses through public-private partnership (PPP). The private builders will construct houses and apartments on either state land provided by the federal and provincial governments for no cost or land procured by them. In either case, they will recover their costs after the sale of the houses and apartments.

While the NPHP is a noble cause, the question arises of whether the government can achieve its target. They’d need to build 100,000 houses every month, which is clearly impossible. To make things worse, the cash-starved government has less money to invest in the project and is hugely dependent on private capital for financing.

At most, it can only provide free-of-cost state land to the developers and subsidised mortgage refinance to buyers to keep the prices affordable. So far, according to government sources, neither federal government nor provincial governments have allocated enough state land for the initiative because of numerous reasons. Even if they do, some Lahore-based developers and builders feel private investors might not be interested.

“The government’s intentions are good but developers and builders like me will stay away from the project. The model isn’t self-sustainable as it doesn’t take economic realities into account. Besides, who wants to construct houses on free-of-cost state land and face NAB inquiries for years after a change in the government,” said a major developer. “It will be a miracle if the government achieves even a tenth of its target at the end of its tenure. A better way to reduce the growing housing gap is to give tax advantages and other incentives to builders and developers – both in the organised and unorganised sectors. The government may continue its NPHP initiative alongside, though.”

At present, the housing market is said to have come to standstill because of the higher tax rates announced in the budget for the current year on construction materials as well as on builders’ income from sale of houses.

The construction cost has almost doubled in one year and the effective rate of tax on profit from the sale of a newly constructed house in the unorganised sector has been raised to 35 per cent. For registered construction companies, the rate is 29pc and the effective tax burden on the association of persons (AoPs or partnerships) ranges from 5pc (on profit above Rs400,000 but less than Rs600,000) to 20-35pc (on profit above Rs4m).

“The government must reconsider the tax rates on capital gains on sale of new houses built in the organised or unorganised sector as it can revive the housing market. It can revive the construction activity, which will support over 40 allied industries and generate huge tax revenues for the government.” said another builder.

The government should also try to provide interest-free mortgage loans through banks or mortgage companies, charging just 2-3pc service charges to assist the industry. “Instead of providing free-of-cost land to developers, the government should rather allocate funds for long-term interest-free mortgage refinance to directly subsidise the cost for the buyers. You will see a massive boom in the housing market if the builders/developers are given tax advantages and house buyers interest-free mortgage refinance. It will also push economic growth, create millions of jobs and revive local related industries”.

Further, he said that the provincial governments should allow private developers to purchase land in brown zones, in city outskirts, to build affordable houses, since property prices within cities are much higher. “The housing industry is a very important one since it stimulates economic activity and employment. The government should reconsider its tax and mortgage policies to revive this sector”.

Published in Dawn, The Business and Finance Weekly, July 15th, 2019