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

Published: April 17, 2017

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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Reader Comments (9)

  • Ghansham Bhutrani
    Apr 17, 2017 - 10:00AM

    Hi, two things, would you mind quoting the source of these ratios?- Also, you say, rent to salary ratio is 1.3 etc. not sure if I get this, does this mean on average people in Pakistan are paying more than 100% of their salary in rent, does not make sense. Appreciate if you could please explain. Thanks. Recommend

  • FAS
    Apr 17, 2017 - 10:43AM

    It is not correct to compare property boom in Karachi with US sub prime crises.
    The main reason in US crises was that housing investment in US is almost 90% based on bank loans. Due to rate increase the home owners defaulted on their mortgage payments thus resulted in huge losses to american banks. While in Pakistan, investments in plots in Bahrain and DHA and DCK is purely based on cash, hence these two situations are not comparable.Recommend

  • Fuzail Zubaid Ahmad
    Apr 17, 2017 - 11:01AM

    Pakistani realty is not mortgage financed mostly, so its comparison with USA’s sub prime crisis is not appropriate. Property prices might not rise fast, or might even drop somewhat, but expecting a wholesale crash is absurd. Recommend

  • Fakhar Hayat
    Apr 17, 2017 - 11:09AM

    I think , author have missed the demographic analysis of Pakistan ,,,, Plz reanalyze the property situation of Pakistan in wake of its demographic … i relive ur view will be quite different. Recommend

  • Mansoor
    Apr 17, 2017 - 11:41AM

    why is the writer comparing Karachi with dubai, mumbai or singapore. Why not compare it with Islamabad, Lahore and Peshawar etc. Recommend

  • Karachi
    Apr 17, 2017 - 12:14PM

    Only reason for price hike is the investment of black money in property, take benefit of govt scheme and not to disclose from where the money earned. Recommend

  • Sultan
    Apr 17, 2017 - 12:56PM

    Yes I agree with other blogger. the writer has not done justice with the subject by quoting irrelevant and faulty figures. He may be an economist but knows very lettle about the market dynamics. For example a 1000 yard bungalow in Karachi defence will cost you 150m to Rs 180 m. the going rental is Re 0.5 m/month or 6 m per year. After making deductions for taxes this may be as low as net 4 million. this mean an yield of less than 3% per year, which is not comparable with investments in saving schemes or investment in mutual funds. inspite of this low return, the property prices are always on the rise, it is the appreciation that keep people interested in investment for long term gains. In Karachi Defence for example, the properties are now valued 3 times they were 10 years ago. This has been the trend since last 50 years atleast and will continue for next 50 years.. Recommend

  • Naeem
    Apr 17, 2017 - 2:24PM

    To think of a city which DOES NOT have water supply, broken sewarage system, non existent health facilities, non existent ambulance, fire fighting or policing……it 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 others….so 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 …so anything goes for the blind and dumb buyers.Recommend

  • Faisal Akhlas
    Apr 17, 2017 - 6:36PM

    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.Recommend

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