Pakistan's property boom is here, but is it here forever?

It is time Pakistan learned from the US subprime mortgage crisis.

Syed Ali Sajjad April 17, 2017
Bahria Town in Karachi. PHOTO: AFP

KARACHI: Everyone in Karachi believes that the safest and most lucrative investment is in the real estate sector these days since it provides the best returns with much less risk and effort.

That is why, every other day, housing schemes are being launched. It means that the property boom is here. But is it here forever? That’s the million-dollar question.

Pakistan real estate boom

These positive sentiments about real estate are not completely ill-founded. They are based on their past track record. People who bought land 20 years ago have multiplied their investment and it is a human tendency to believe that things would turn out as they have happened in the past.

But this is a dangerous route to reason. According to this reasoning, a chicken, which is well fed by its keepers, must believe that it would never go under the knife, based on the past benevolent behaviour of the keepers.

We all know the inherent fallacy in the chicken’s reasoning. So, shall we continue to believe in the glorious past or is it time to take a step back and ponder?

What the people of Karachi believe today is exactly the same notion that the whole of Wall Street believed till 2007. They also believed that property prices cannot go down. Hence, we witnessed the sub-prime mortgage crisis in the United States which was an unprecedented financial debacle.

Two prominent investors – Nassim Nicholas Taleb and George Soros – made enormous money in those times. Taleb included black swans (events with very low probability of occurrence but very high impact), such as property price decline, in his financial models. On the other hand, Soros was saved because he used to bet against himself as well.

Barring the two unusual players on the Wall Street, everyone believed that property prices could not go down. So, to crack this puzzle of property investment, one must take the unconventional and the unusual route.

People with conventional wisdom always say that prices in metropolitan cities are much higher than prices in Karachi. Hence, there is further room for appreciation.

These people compare the prices of Karachi with Shanghai, Mumbai, Singapore and Dubai and observe that prices in Karachi are still much lower. So, let us compare some statistics of Karachi with these cities.

It is true that per square metre prices in Karachi ($760.78) are much lower than average per square metre prices ($8,824.60) in the metropolitans.

However, we must realise that the fundamental value of a real estate investment is largely influenced by its rental value. Rent-to-price ratio in Karachi (0.54) is lower than the ratio of Dubai (0.83) only. Shanghai, Mumbai and Singapore have much lower rent-to-price ratios than Karachi.

This means that, on average, rents in Karachi have already peaked as a return on investment relative to other big cities. Furthermore, people in Karachi are already paying much more rent in comparison to their salaries.

Rent-to-salary ratio of Karachi (1.30) is only lower than the ratio of Mumbai (2.07) and Shanghai (1.88). Dubai and Singapore have lower rent-to-salary ratios.

This means that, on average, people in Karachi are paying too much rent in comparison to their income when compared with other big cities.

From Dubai back to Pakistan: the real estate investors’ journey

The only plausible reason for such high prices in Karachi is the burial of illicit money in the property market. Furthermore, tax avoidance also makes property investment a lucrative strategy.

A few changes in regulations (filer/non-filer issue) have been tried to curb the above two avenues. Otherwise, as per the rental yield analysis, fundamentals of property investment in Karachi seem very weak.

We all know deep down in our hearts that these prices can’t go up forever. Yet, the herd mentality, marketing noise and the fear of losing a big investment opportunity compels us to believe otherwise. But it is time to hold our horses and take a step back to ponder Taleb and Soros.

The writer is a corporate banker and teaches economics

Published in The Express Tribune, April 17th, 2017.

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Faisal Akhlas | 7 years ago | Reply The boom also causes thiefs to enter the market who prey on poor people money on promise of good returns or a dream of a house. Lost a lot of money in several schemes launched by friends. State bank society was a recent example, wonder why state bank remained quite for a decade and just recently launced a disclaimer ad. Be careful, i believe that cooperatives need strict jurisdication.
Naeem | 7 years ago | Reply To think of a city which DOES NOT have water supply, broken sewarage system, non existent health facilities, non existent ambulance, fire fighting or would be mad to consider Karachi among the league of international cosmpolitans. It is a cage, a cage where people from all over Pakistan flock down to. More than 50 % of the city is a ghetto and katchi abadi. This is a great city if you are coming from Sahiwal or Layyah.....NOT if you are born and raised here. Remember in a closed market( jails etc), even used under garments are sold for a premium and thats what is happened here. Alraeady, the houses and apartments are cheaper in UK and USA than Karachi....says a lot why this is a bubble in Karachi without any merit or market fundamentals. Don't get me wrong, I am a born and raised Nazimabadi who has been a bit more fortunate than I dont need sermons about Karachi bashing...the fact remains that the real estate market is rigged, the estate agents are flogging dead meat as cattle and there has never been an independent appraisal of the property anything goes for the blind and dumb buyers.
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