The real estate sector in Pakistan cannot be fully considered a market due to the absence of a centralised platform that facilitates direct interaction between buyers and sellers to discover appropriate deals for their properties.

Theoretically, a market is delineated by its unique attributes, comprising a platform where buyers and sellers convene to execute transactions. The availability of extensive market dynamics and pricing information accessible to all participants should complement this platform.

Similarly, the efficiency of a market is gauged by the flow of information, leading to its classification into weak, semi-strong, and strong forms of an efficient market, each differentiated by the extent and nature of information dissemination. Although private platforms such as Zameen, Gharana, and others exist, they typically offer property valuations in an estimated fashion rather than as the result of demand and supply.

Developers or state institutions, through the District Collector (DC) rate and the Federal Board of Revenue (FBR) rate, determine the price of real estate properties. However, it is crucial to acknowledge that the valuation rates provided by neither private forums nor state institutions accurately embody a realistic approach to property valuation. The former often bases its projections of price growth trends on speculative information and artificially induced trends rather than on genuine demand for properties.

The sector lacks a structured mechanism that allows individuals to access valuation data for properties

Such methodologies significantly influence consumer-purchasing decisions and alter the overall pricing dynamics within the market. This, in turn, contributes to the formation of price bubbles and undermines the natural growth of the market.

Consequently, property prices become prohibitively expensive for the actual end users, with transactions predominantly circulating among investors.

A significant portion of the market’s participants includes expatriates, who typically rely on these forums to search for properties. This reliance shapes their expectations regarding price points even before any direct negotiations take place, contributing to the formation of further mispricing dynamics.

As a result, property prices remain inflated despite low demand and diminishing economic activity. Despite these trends, these platforms continue to depict a narrative of growth, which contradicts fundamental economic principles, leading to a skewed representation of market realities.

According to Nadeem ul Haque, Vice Chancellor of the Pakistan Institute of Development Economics, the real estate market lacks a structured mechanism that allows individuals to access valuation data for properties.

This absence undermines a fundamental aspect of market dynamics, specifically the availability of information necessary for making informed decisions. Consequently, individuals seeking to sell property are challenged by the lack of a pricing baseline and the difficulty in connecting with potential buyers.

Transactions within the sector often rely on an information cascade, a phenomenon where decisions are made in sequence, heavily influenced by the guidance of real estate agents, developers, and their marketing agencies.

This decision-making process is particularly observed among expatriates and others who rely on online forums and their peers. As a result, the valuation of properties becomes a matter of subjective opinion rather than objective data.

This reliance on hearsay and speculative information, rather than empirical data, leads to a conformity pressure that exacerbates the issue. Such opinions, often rooted in rumour rather than fact, contribute to a divergence in valuation perspectives. This divergence, in turn, fuels mispricing within the market, creating discrepancies between the perceived and actual values of real estate assets.

On the other hand, the valuation of DC and FBR rates does not adhere to any quantitative analysis but rather relies on subjective assessments and opinions.

Three well-regarded methodologies for property valuation exist: the Comparative Market Analysis (also known as the Sales Comparison Approach), the Cost Approach, and the Income Capitalisation Approach.

Unfortunately, DC and FBR rates do not align with any of these established methods. Moreover, these rates solely appraise the value of the land, excluding the overall property valuation.

In the context of regulation, there is a common perception that the real estate sector operates with minimal oversight. However, this is a misconception; the sector is, in fact, heavily regulated, albeit with limited adherence to these regulations. A significant number of state institutions are involved in the real estate industry, particularly in the issuance of no-objection certificates (NOC).

Despite this, within the Islamabad territory alone, where there are over 100 housing societies, of which a few are legally recognised. Moreover, there is a notable prevalence of real estate fraud cases pending in various courts and with the Federal Investigation Agency (FIA) and the National Accountability Bureau.

Interestingly, these housing societies often engage in the sale of plot files, which essentially act as promissory notes guaranteeing the allotment of a plot to the holder. This practice raises questions regarding regulatory oversight: should the State Bank or the Securities and Exchange Commission be responsible for regulating these transactions?

Furthermore, these societies frequently sell a number of files that significantly exceed the land available for allotment, yet agencies such as FIA, NAB and Capital Development Authority seem unable to curb these irregular activities effectively.

Real estate owners have established an oligopoly by engaging high-ranking retired civil and military officers, founding their own media outlets, and investing in political parties to perpetuate this model with state patronage. This approach has disrupted the entire economic ecosystem, leading to the marginalisation of other industries and the exploitation of customers, struggling to secure their allotted plots or recover their investments with penalties from these entities.

The issue raises a critical question — which regulatory body is equipped to support consumers as they confront these challenges and seek redress? This question becomes particularly pertinent given that these institutions themselves are entangled in the oligopoly through the establishment of their own housing societies.

The writer is an Assistant Professor (PhD Financial Economics) at the National University of Modern Languages, Islamabad.

Email: abwahid.fms@gmail.com

Published in Dawn, The Business and Finance Weekly, February 26th, 2024