Macro Bites

Macro Bite # 10

5 min read

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How has inadequate housing in Pakistan affected citizens?

The last time official housing indicators were collected in Pakistan was back in 1998. So the numbers are a bit outdated. The rough story looks like this:

Stock of housing: 19.3 m units (1998 Census) – most recent estimate 21.7 m (2011)

Demand of housing: 700,000 units a year

Supply of housing: 100,000 – 350,000 units a year

Shortage of housing: 4 m units (1998), 7 m units (2011), 10 m units (2020)

This shortage is expected to grow by 350,000 to 400,000 units each year. Given the issue was identified as early as 1998, successive governments have attempted to address it. But let’s try to understand it a bit more.

Housing is important

Source: Pakistan Bureau of Statistics (PBS)

Housing is part of the services sector that adds value on top of the industrial sector of construction. Combined, both sectors contribute 7.4% to Pakistan’s nominal GDP but if you include allied industries (e.g. cement, steel, timber, paints), the contribution is much higher at 10-12%. Notice the growth of both sectors too. Housing sector has been growing at over 10% each year since 2015, while construction sector has only grown by 8% in nominal terms. However, if you consider real growth, both sectors have, on average, grown by 4% annually. Price increases have dominated growth for the housing sector instead.

Housing is very important

From household surveys, we know that almost 25% of total consumption is housing and utilities. This already shows us that the 12% contribution to GDP is a bit understated. Consumption numbers are higher in urban areas as compared to rural areas, primarily because of population growth and increased rural-urban migration. Urban households are spending increasing amounts on housing and utilities, up from 26% of consumption in 2014 to almost 29% in 2019.

Source: Household Integrated Economic Survey 2018-19

Why the increase in urban areas is significant is because these large cities spur productivity growth and job creation, specifically in manufacturing and services. Think of the productivity boost someone from rural Sindh gets when they come to seek better job opportunities in a city like Karachi. Out of the 10 million units shortage, around 50% is in urban areas. Most of this shortage is met by migrants settling in informal subdivisions of agricultural land (ISALs). Not only are these spaces devoid of basic urban services, they also add to culturable waste that could otherwise be used for agriculture.

Living in close quarters

With messy urbanization and congestion of urban cities, it is no surprise that Pakistan has one of the highest persons living per room in the world. On average, about three persons live in a room in Pakistan, as compared to India’s 2.7 and Sri Lanka’s 2.2.


Source: United Nations

These numbers are still from the 1998 census and it would be safe to assume they have gotten worse. Many of these statistics also only track formal housing units. In 2009, another estimate showed that 46.6% of urban population was living in slums or katchi abadis. However, given the pace of population growth and the rising shortage of housing units in Pakistan, the situation is getting worse

To get rich is glorious

It should be easy to see who endures the worst of this housing crisis. The shortage disproportionately affects lower income segments with a higher burden of inflation. Lower income families have more people per household and require larger housing units.

Source: Pakistan Bureau of Statistics (PBS)

You can read the full article below to understand other pricing statistics but if you notice the chart above, the bottom 3 quintiles, which represents the lowest 60% of income earners in Pakistan, experienced higher housing inflation than the rest of the country. These problems have only exacerbated over the years while successive governments have attempted to address it.

To be a banker is glorious

We have discussed before how money makes money and how financing is important for investment. The same principle holds for housing investment too. However, Pakistan also lacks a developed mortgage market. Mortgage to GDP ratio of 0.27% is well below South Asian average of 3.4% and India’s 10%. Furthermore, a majority of these housebuilding loans go to bankers.

Source: State Bank of Pakistan

Pakistan has very weak foreclosure laws, which means banks do what they can to secure their loans. If a borrower defaults, it is hard for banks to take control of and sell properties. You can read the full detail here, but main point is that the lawmakers are trying to change this given the need to make Naya Pakistan Housing Scheme a success. In the meanwhile, banks find it easier to provide housing loans to their employees since they have control over their future salaries as security.

Investment is bad

In addition to legal issues, housing and construction were also subjected to additional tax measures in 2018-19. Devaluation of the currency meant cost of building materials also increased. Hence, while there was strong growth in investment in housing, mostly by the private sector, investment in construction actually declined in the last few years.

Source: Pakistan Bureau of Statistics (PBS)

This should be a bit counter intuitive. If construction sector was in decline, why was the housing sector doing so well? Read the full article below to understand how the answer lies in Pakistan’s obsession with owning real estate. Low cost housing has been committed PKR 30 billion in this year’s budget and the hope is that the new government can do a better job at addressing this issue than those before it. We will discuss public finances of Pakistan next and try to put these numbers into perspective

Read the full article in the link below

How has inadequate housing in Pakistan affected citizens?

Explore how burden of inadequate housing falls on low-income families, why mortgages have failed to pick up and why investment in the sector is misplaced.

Read more

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Faiz Ahmed

MBA Candidate at Harvard Business School with prior experience at Bain & Company, International Finance Corporation and State Bank of Pakistan. He is also the Founder of Macro Pakistani.

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