The real estate industry in Pakistan heavily relies on speculative motives, resulting in an excessive supply of property titles disconnected from actual land ownership.

This has led to a situation where file ownership rather than land ownership is prevalent, and housing societies operate without necessary no-objection certificates (NOCs), further detaching the industry from reality. Unfortunately, obtaining a file does not equate to ownership of a plot.

Developers intentionally oversell files, often by 50 per cent more than the land they own. These oversold files are then repurchased under the guise of affidavit files, as developers lack sufficient land to offer more plots. This practice has resulted in numerous scams that have been under investigation in court for decades.

In essence, the real estate industry operates similarly to a casino business, where even experienced and reputable individuals cannot guarantee a win.

In Islamabad, the cost per square foot of an open plot in 2012 was Rs1,120 but has now crossed Rs7,000

Despite the lack of guarantees, individuals continue to place their hopes on it, holding out for that elusive jackpot. Similarly, in the real estate market, the announcement of new schemes generates a great deal of buzz and excitement among potential buyers seeking investment opportunities.

Developers often fuel this excitement through the lure of discounted prices, flexible payment plans, and other promotional offers, enticing investors to invest. This, in turn, creates a speculative market as investors keep an eye out for the next big opportunity, as exemplified by the current Bahria Town Karachi 2 project.

There are more than 14,782 plot files that are currently available for trading in different cities, according to Zameen.com. Despite the knowledge of oversold files, investors continue to demand more.

However, many of these files are purchased by speculators or individuals who lack the financial means to pay in full, resulting in a cycle of reselling files to prospective investors. Subsequently, overreliance on file ownership has created a market fueled by speculation and greed.

In a manner similar to the casino industry, real estate represents a highly lucrative venture and offers a substantial opportunity for individuals seeking a dependable source of income. Nonetheless, a cautious and prudent approach to investing in real estate can foster a comfortable lifestyle. For example, in Islamabad, the cost per square foot of an open plot in 2012 was Rs1,120, but presently, it surpasses Rs7,000, reflecting a yearly profit of over 40pc.

Regrettably, like compulsive gamblers who cannot resist the urge to gamble even when it has detrimental consequences, some real estate investors exhibit compulsive tendencies, regardless of their knowledge of the illegality and fraudulent nature of certain housing societies.

According to the Capital Development Authority (CDA), over 65 housing societies in Islamabad have received approval for their Layout Plans (LOPs), but 50pc of these societies’ NOCs are still pending.

Additionally, six societies have had their NOCs revoked due to LOP violations. Moreover, there are 146 illegal housing societies in Islamabad that promote themselves through promotional materials such as banners and panaflexes displayed on main roads, highways, and busy intersections in Islamabad and Rawalpindi to attract prospective buyers. Although purchasing plots in these societies can lead to a financial downfall, individuals continue to invest in these areas and endanger their life savings.

The cost of easy money generated by real estate can be difficult to quantify, but its impact on the quality of life for those who do not play an active role is significant.

A recent study conducted by the Lahore University of Management Sciences has revealed that income growth in Pakistan is disproportionately distributed, with the top 10pc of households receiving 24pc of the total income growth while the bottom 50pc only received 32pc of it.

If one sector, such as real estate, offers a much higher rate of return, ie 25-30pc compared to other sectors, ie 10-15pc or GDP growth, ie 3-5pc, wealth and income tend to become concentrated in the hands of agents of that specific sector. Consequently, the real estate sector has attracted investments exceeding $88 billion in Pakistan.

As a consequence, the benefits of economic growth are not evenly shared, particularly among those who lack access to land ownership. Due to the high profitability of the real estate sector, many industry and production sector owners have diverted their investments towards it, resulting in a significant decline in investments in other sectors.

As a result, Pakistan is currently experiencing an investment deficit, with an investment-to-GDP ratio of less than 20pc, private investment to GDP of only 10pc, and foreign direct investment at only 0.8pc over the last decade.

Real estate generates short-term employment and wealth but doesn’t continuously add value to the economy as it is stagnant and doesn’t contribute to local or international trade, unlike industries.

Real estate investment growth is inversely related to other sectors, causing increased unemployment and trade deficit. Based on data from Zameen.com, it can be observed that house prices, plot prices, and residential property prices in Pakistan have experienced significant growth since 2007, increasing by approximately 3.5, 3.9, and 4.2 times, respectively.

However, the country’s unemployment rate has risen from 0.40pc in 2007 to 4.50pc currently. The consistent annual deficit in the balance of payments is mainly due to the low supply of local goods and the high demand for imported products. Cost-push inflation has resulted in local industrialists diverting their investments to the real estate sector.

Consequently, the trade deficit in 2022 Q1 was reported to be the same as the entire trade deficit of $6.878bn recorded in 2007. The real estate sector is being managed by the politically powerful elite under state patronage, where they disproportionately benefit from the real estate sector through tax incentives and amnesty programs.

The writer is an assistant professor (PhD Financial Economics) National University of Modern Languages (NUML), Islamabad (abwahid.fms@gmail.com)

Published in Dawn, The Business and Finance Weekly, May 15th, 2023