Declining property prices

Real estate markets around the world are experiencing a common trend of price inflation due to investment by foreign buyers: businesses and individuals who use properties abroad to park their income. As a result, prices may go up to such an extent that buying homes becomes nearly impossible for the local middle class. A similar situation has arisen in Pakistan where property prices, particularly in big cities went up at a breakneck pace within the first half of this year. However, after the government revised its tax laws in a bid to deter parking of black money in real estate and also to increase tax collection, the property bubble appears to have sagged. As per reports of real estate market watchers, prices have gone down across the board in the third quarter of 2016. Karachi, Lahore and Islamabad have all seen drops in prices of plots in highly sought after areas as well as more modest locations. It has also been reported that the decline has led to closure of several hundred real estate agencies, many of whom relied on speculative investors to drive up their business.

Although the promotion of investment both local and foreign is one of the key requirements of economic growth, unregulated speculative buying must be curbed. Several developed countries are already looking for ways to resolve an unprecedented housing crisis particularly for younger buyers who are unable to afford to buy their own homes. If our government has managed to drive out speculative buying with a change in its tax regime then this is a laudable move although its short term effects may be negative for certain parties. Tax avoidance tactics are common in our country and even though individuals may benefit from tax subsidies for certain sectors, the country as a whole must suffer. The real estate market must be given time to reach a new equilibrium since the drop in prices was an expected side effect of the new tax regime. As yet, it is too early to predict whether the policy will have any long-term negative consequences.

Published in The Express Tribune, November 8^th, 2016.

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