Pakistan is facing shortage of over 9 million housing units as formal financial sector caters only up to 2 per cent of all housing transactions, the lowest ratio in the region.
The State Bank’s Quarterly Housing Finance Review, released on Friday, stated that there was shortage of around 8 million housing units in 2009, which has been accumulating by 0.34 million units every year (World Bank, 2009).
The report said the informal lending caters up to 10-12pc of transactions for housing.
The property development industry suffers from low public confidence. Financial weaknesses and the absence of clear and fair business practices have affected its credibility, contributing to the reluctance of financial institutions in providing development and construction finance.
There is a need to strengthen the property titling and land administrative procedures including improvements of the legal provisions, standardization of processes, and computerization of all relevant revenue records, said the report.
Although the regulatory framework for land registration and transfer regime exists in Pakistan, the process by which land is acquired and registered is cumbersome at times, because of number of institutions and registration procedures required to execute property transactions, the report observed.
Land records are manually maintained leading to errors and omissions translating to modest commercial value for the mortgage financial institutions especially in rural and some urban areas. The lack of efficient and reliable system of ascertaining the bona-fide of property titles has forced banks to limit the access of housing finance to a certain number of urban localities within the urban centers.
In addition to this, national and local master plans for town planning and housing facilities are either inadequate or poorly enforced, which leads to inefficient allocation of land and uncontrolled urban development.
Over-restrictive building codes and laws on subdivision limit the efficient use of urban land and increase the price to consumers, especially in zones having relatively higher prices of lands. Moreover, the large scale projects often get delayed due to failure of utility companies in connecting new housing developments in time.
As far as the real estate sector is concerned, majority of real estate builders and developers are working as sole proprietorships or partnerships with limited capital and informal corporate governance structures.
Absence of sound governance structure within the housing developer industry creates lack of good practices, illegal construction, unreliable building permits, and legally unprotected advance purchase of units that are required to be built in future.
The unstructured and unsupervised nature of business of real estate brokers/ agencies, which could serve as natural arrangers for the provision of financial services, is also a significant constraint to the provision of housing and housing finance.
Consequently, it is difficult for financial institutions to verify the character, capital, and capacity of potential clients. Risk assessment and portfolio valuation is also fragile, which is another factor for the lenders’ extreme caution for transaction initiated by these venture.
As a result, financial institutions are reluctant to enter this market, which in turn causes scarcity of finance and constraints in the supply of housing.
“Without using a strong regulatory authority to enforce corporate governance and allied standards for this sector, the quality of availability of housing facilities across population spectrum may not improve,” said the report.