Bridging the Gap: How Much Can 40 K Subsidized Homes Help Pakistan?

Pakistan is one of the worst hit with a housing under-supply of more than 10 million housing units in South Asia. The competition of housing in urban areas has caused the low-income and middle-income families to have the dream of cheap housing in millions. In this regard, there is the government initiative of building 40,000 subsidized houses under the different public and private partnerships which have attracted a discussion on the results that these will reflect.

The proposed move is excellent but the question still lingers; will 40,000 units in one go make any significant contributions into bridging this huge housing gap or is it a drop in the ocean? To answer this question, we have to immerse ourselves in structural issues of the housing market in Pakistan, the importance of subsidies, and unaffordability, and government interventions. This blog discusses the predicaments of housing deficit, analyzes the extent of respite that 40,000 subsidised houses can produce and looks at the next step in Pakistan housing policy.

The Housing Crisis and the Size of the deficit

The problem of housing shortage is not a simple number in Pakistan but a day by day endeavor of millions of Pakistanis. The statistics given by industry experts and recent urban studies indicate that the country needs more than 10 million new housing facilities to address the prevailing housing needs as 700,000 new residential units must be created annually to counter the population increase. However, unfortunately the number of built houses annually is far lower than this point and especially in the field of affordable housing.

Consequently, the number of the informal settlements, which are also referred to as katchi abadis, has increased manifold in cities such as Karachi, Lahore, and Islamabad. These villages do not have any basic amenities like quality sanitation, water system, and stable land ownership compounding the quality of life problems of the occupants more so.

Among the largest factors of this housing shortage is the overweight of demand and supply in city areas. More than 70 per cent of Pakistani population is in the low- and lower-middle-income group and 1 per cent of formal housing projects are equipped to serve this segment. The upper-middle and high-income strata are the main targeting segment of the available housing provision made by the private developers because luxury apartments and gated communities yield better profitability. The outcome is unviable distance between the kind of houses constructed and the kind of houses required by most of the Pakistanis.

Though government actions deserve attention, these have been disjointed and slow. Previous efforts like the Apna Ghar Scheme and the Naya Pakistan Housing Program (NPHP) tried to fill this gap but has failed because of ineffective bureaucratic systems, high costs of construction and less availability of finance to low income buyers. The urban areas have experienced the volatile acceleration in land prices that makes building affordable houses in an urban environment an uphill task. Even those targeted at low-income classes tend to be segregated in areas that are too far away from the urban center, which reduces people access to workplaces, education, and medical care.

That being the background, the news of the 40,000 subsidized houses is a good move. The figure, however, is not big compared to the size of the problem the number of the deficit that exceeds 10 million units. It is a fraction of less than 0.5% of total deficit. In order to actually understand the possibilities of these 40,000 homes to the fullest, we must look at the quality of these homes, their location, and their price coupled with ease to get access to necessary amenities.

Subsidized Housing as a Whole

Subsidized housing has been exceptionally imperative in eliminating the housing gap, which is ideal in nations that have large deficits when it comes to housing. Subsidies in the case of Pakistan are necessary considering the increasing disparity between household income and property prices. As an example, the price of an average sized apartment in a good sector of a big city such as Karachi, Lahore or Islamabad may be between PKR 6 million and 10 million which is well out of the reach of average citizens who earn around between PKR 50,000 to PKR 150,000 yearly.

Unless there are financial governmental activities, e.g. subsidies on the interest rates, price capping, or cheap housing loans, the idea of owning a home continues to be a dream to most of us.

The 40,000 subsidized homes plan is a measure to solve this as it will cash in on the financial load on low and middle income purchasers. The government should avail land on concessionary rate, development fees should be minimized and government should partner with the private developers with the aim of constructing affordable housing. When properly controlled, this program will determine the trend in subsequent projects by motivating the need to invest in projects with medium and low affordability instead of focusing on luxurious ones.

Nevertheless, the subsidies are not the answer to the problem by themselves unless they form the larger strategy. An illustrative example is that the homes to be built on subsidized basis should be built at sites that should be well connected to transport system, schools and health institutions. This is because otherwise, low income buyers will be subjected to the disadvantage of high commuting budgets and job access. Moreover, the quality of constructing and sustainability is important. Poor quality housing can only be pocket friendly in the short term since maintenance process of such buildings can be very expensive.

The value of public-private partnerships (PPPs) in scaling up affordable housing can be traced using the international examples. Countries such as Malaysia and India have been very successful in housing schemes established where government participation is coupled with the effectiveness of the local developers. Given that Pakistan needs to accommodate 40,000 new homes, the plan should not just be based on subsidies but need to include new forms of financing, the use of land efficiently, and ways of encouraging developers to provide quality and affordable homes.

Affordability and Accessibility Challenges

Affordability is one of the major issues that the housing industry is experiencing. Most of the low-income households, despite the government subsidies, find homeownership difficult because they cannot attain mortgage financing. Pakistan mortgage-to-GDP ratio stands below 0.5 per cent and is among the lowest in its region, as opposed to other states, such as India (about 11 per cent) and Malaysia (more than 30 per cent). Interest rates charged on loans on housing are so high reaching to 12-15 per cent and hence the monthly payments are unaffordable by the people who earn a low salary. A well-established and flexible funding system brings in subsidized houses without the price tag, which could still be inaccessible to the targeted citizens.

The last fact is accessibility. Due to price of land being high in urban centers, several development of affordable housing facilities are established in the outskirts of major cities. Though this saves the cost of construction it tends to isolate people in terms of basic amenities like job facilities, health clinics and schools. As an example, low-cost housing plans in distant locations tend to put the individual under poor commuting conditions, very costly and time-wasting. Eventually, this lowers the marketability of such houses to the extent that some consumers either sell their apartments or could leave their units abandoned.

Besides, the absence of adequate infrastructure within and near affordable housing projects is of great concern. In the absence of reliable roads, water supply, sanitation, and electricity, the developments have the possibility of turning into low quality settlements within no time, and this brings them back to the same issue that they intend to solve. The success of the 40,000 subsidized homes will be related to need to have these units as part of bigger urban development strategy that should have proper infrastructure and provision of social amenities.

The other problem is cultural preference towards homeownership as opposed to renting. Accordingly renting in most of the developed nations is an affordable and reasonable process but in Pakistan people consider renting as a solution only whereby families hope to have their own property one day. Such a mentality and the subsequent increase in the costs of lands result in a high level of demand in the affordable houses, further weakening the available resources. To solve this, the government also needs to look at ways to make renting a more appealing option, which include rent-to-own schemes, tenancy security legislation, and providing developers with an incentive to construct rental property.

Potential Investment and Long Term Effect

Irrespective of the difficulties, there is a great deal of investment potential and certain long-term socio-economic in the construction of 40,000 subsidized homes. Housing sector is notorious in its effects to the economy which is a multiplier since it provides work to construction, manufacturing and service sector. Each house constructed has a need of cement, steel, tiles and also asks to provide labor both unskilled and skilled. An economically successful housing program can therefore enhance an economy and meet a serious social issue.

To investors, the affordability housing is becoming a potential segment especially with the emergence of PropTech platforms and Real Estate Investment Trusts (REITS). Developers that were used to the high-end developments are currently investigating the middle-income housing because it is still on demand, and the threat of oversupply is comparatively low. The subsidized housing programs offered by the government can also open the doors to enable the developers to procure cheap land, lower their expenses based on the tax exceptions and satisfy a wider range of market.

The implications of 40,000 subsidized homes are not only an economic one. Owning homes helps in giving a sense of security, stability and social mobility to the families. They can deposit their kids in schools, accumulate money in the long run, and get out of poverty. To magnify this influence, the government should make allotments transparent, moreover, it should not introduce politics in the process and establish tracks or modes that will not engender the mismanagement of the subsidies. Pakistan has in the past witnessed negative publicity regarding the poor management of housing schemes, where houses that were meant to be sold to low-income earners ended up with richers or were sold at a higher price.

Looking at the bigger picture, 40 000 homes are merely a start. In order to bring down the housing shortage to a large degree, there is a necessity of Pakistan constructing at least half a million of affordable houses in a year during the following ten years. This needs to be done in a massive manner such as digitalisation of land records, simplification of permissions, and encouraging vertical buildings in towns. The sector also can be scaled with innovative solutions such as modular housing, micro-apartment and smart financing tools.

Global Lessons for Pakistan’s Affordable Housing Drive

The affordability housing is not a new problem just to Pakistan but it is a world wide problem that most countries in developing and the developed segment of the globe have struggled with in the last couple of decades. Other nations like India, Malaysia, Singapore, and even Brazil have provided cost-effective housing on such magnitudes and their lessons which the policy makers and other stakeholders of the private sector in Pakistan can learn. Through these models, Pakistan will have an opportunity to define the best practices that can assist the country in amplifying the making difference of its 40,000 subsidized homes and upcoming housing programs.

India is an example of a country that has made tremendous progress to overcoming its urban housing crisis via the Pradhan Mantri Awas Yojana (PMAY) initiative that will aim to house everyone in affordable homes by 2024. The initiative is providing credit-linked subsidies, in-situ slum rehabilitation, and collaborations with the lenders in private developers to generate affordable housing en-masse. Since the institution was formed, the program has built millions of houses mostly in rural and urban communities.

It has reach success by blending government-sponsored subsidies and access of cheap financing to low income earners. India has already tried an integrated approach and Pakistan can look into it, especially ways of streamlining the financing mechanism and making the projects strongly connected to the demands of the urban and peri-urban communities.

Another model that should be looked into is Malaysia housing. Malaysia has been able to collaborate with the private developers in building affordable houses of high quality with an excellent infrastructure through its PR1MA ( Perumahan Rakyat 1Malaysia) program. It also implements new forms of financial arrangements, including rent to own program, according to which residents can change their status as the renters to the house owners with the course of time.

This will solve the problem of affordability without straining low income-earning families immediately. Introducing similar rent-to-own models in Pakistan could upscale the number of people with access to housing especially when households are not eligible to obtain a conventional mortgage portfolio on basis of low credit rating or incapable of steady earnings.

The system of the public housing in Singapore is regarded to be one of the most successful in the world. More than 80 percent of Singaporeans use housing whose quality is high and built by the government through the Housing & Development Board (HDB) which is affordable, well maintained and incorporated in the urban planning. Long-term planning, good control through regulatory powers, and development on vertical housing are areas that made HDB model a success. Since Pakistan is rapidly shifting to the urban setting and especially the problems of insufficient usable land in the large cities, vertical housing can be the best way to scale affordability.

The expansion around the city centers in the form of sprawling developments should be abandoned in preference to building vertical, mixed-use communities with both residential and commercial possibilities.

Experience gained by Brazil in its Minha Casa Minha Vida (My House, My Life) program is also informative, especially in its focus on the utilization of housing development as a poverty reduction instrument. Millions of low-income homes have been given via the program through government subsidies and available credit plans. An interesting part of this initiative is the fact that it was linked to the social services and infrastructural development. In the case of Pakistan, affordable housing will not only just in its own individual dimension but along with transportation, schools, hospitals, and utilities, it will be a part of the larger urban development strategy.

Conclusion

The project to develop 40000 subsidized housing in Pakistan is a welcome initiative and a wake-up call to the gigantic task that still needs to be accomplished. Although such a figure will not fill the gap of more than 10 million units, this success can be used as a guide into future projects of this magnitude. Working out the issue of affordability, accessibility, and quality is the true challenge. Subsidies should be combined with well-developed infrastructure, effective urban planning, and policies that are inclusive to the needs of the low-income families.

In their quest to narrow the divide, Pakistan should focus on an all-inclusive framework that will harness the efforts of the government, innovation and financial moves by the private sector. Instead of being regarded as the social duty, affordable housing can and must be considered as the source of economic growth and national stability. The 40,000-home initiative will have the capacity to start a ball rolling and they must be amplified to an enormous scale, with a long-term vision of sustainable and inclusive housing.

After all, the question is not whether 40,000 homes are sufficient as a starting point, which is evident that they are not, but whether this project can be an impressive example to motivate a change in perspective to housing development in Pakistan. When it is carried out with due transparency and vision, it can set the stage towards a future where every single citizen will get access to safe, affordable and decent housing.

Also Read: Equilibrium Effects of Housing Subsidies