Should we be optimistic about NPHP?
The writer is a Senior Fellow at the Centre for Urban Research and Policy at the Institute of Business Administration, Karachi
Pakistan is a country that suffers from huge urban housing shortages of about three to four million units. Urban housing demand has been rising by about 400,000 annually due to a rise in population as well as internal migration. These housing shortages affect the low-income population more as it cannot afford the high prices of formal housing, and does not have access to credit facilities that are only available with collateral and formal jobs.
Over the years, land-related constraints and an underdeveloped housing finance system have impeded the development of housing in the country. Land is continuously being used for speculative purposes, which has distorted the land market, resulting in exorbitantly high land prices and pushing housing out of reach of the low-income population. Mortgage lending has also been limited due to lack of foreclosure laws, and cumbersome and expensive judicial proceedings. Due to an unreliable property registration system, lenders have lent to areas with clear land titling, which further limits mortgage financing to low-income borrowers.
Thus, the provision of housing to low-income groups has always posed serious policy challenges. The government’s ambitious Naya Pakistan Housing Program (NPHP) of 2018 aims to provide subsidised mortgage finance for housing to low-income groups (5% for 5 marla houses and 7% for 10 marla houses over a period of 10-20 years), and construction finance (through tax relief and tax amnesty) to incentivise developers to build more low-cost housing units.
The above effort shows the commitment of the government, but the programme has been criticised for being too ambitious. So, should we be optimistic about the government’s policies and its ability to provide sufficient affordable quality housing to the urban low-income communities? The answer depends on how efficiently the policies are implemented, how well they fit the needs and preferences of low-income end users, and the extent to which the low-income groups benefit from them. It is commonly recognised that high land prices lead to high housing prices, making housing unaffordable for the low-income population, yet the government’s housing programme does not provide any subsidised loans for purchase of land. Making enough land available at appropriate locations free of cost or at highly subsidised rates, and its transfer to the project in time, is fundamental to the success of the programme.
In November 2020, the SBP announced regulatory relaxations to incentivise banks to lend for affordable housing. These urge banks to use alternative methods to identify income sources and credit worthiness of the borrowers, and exempt them from the requirement of using ‘verifiable income’ in calculating the debt burden ratio (DBR). The definition of low-cost housing finance under the current regulation for banks has been aligned with the definition under the government subsidy facility, so the banks will be able to benefit from both facilities. To ease lending, banks have been exempted from the requirement of observing the DBR and the Internal Risk Rating System for low-cost housing finance until September 30, 2022.
The SBP’s relaxations will no doubt broaden eligibility for affordable housing finance, but they will not enhance the borrowers’ repayment ability. Low-income borrowers, with limited or no savings, may find it difficult to pay even low instalments (of Rs10,000-20,000) in times of rising food prices and economic hardships following the Covid-19 pandemic. Although the government intends to cover the long-term funding with a 40% loss cover on portfolio basis and up to 25 years of funding, it needs to be ready with a plan to cover all the likely defaults, and to ensure that too many of the poor do not lose their houses.
In July 2020, the SBP mandated the banks to lend 5% of their loan portfolio for housing and construction financing by December 31, 2021. However, meeting this target seems unrealistic for several reasons. The foreclosure law is pending review by the Supreme Court and may require a constitutional amendment as it allows evacuation without judicial process, and computerising land and property records for clear titling is going to take some time. The target also seems unrealistic as the current lending base is small. According to an estimate, 333,000 borrowers will need to be added by the end of next year to meet the target.
NPHP is proposing provision of only 9% high-rise compared to 58% low-rise housing, which will further push low-income housing to the periphery, where land is cheaper. In the past, poor communities have shown a preference for living near places of work and social networks. Under the programme, locations have been identified and, in some cases, land has also been allocated without assessing the needs of the end users. If there is any hope of remote housing at the periphery to be fully occupied, the government will have to invest heavily in improving the transport system and making longer commutes comfortable and affordable.
Since the high land prices in the inner cities have pushed informal housing to the periphery, low-income households have chosen to rent in the inner city rather than own at these remote locations. Informal housing developers have responded by upward extensions in the inner city katchi abadis, resulting in densification. The government must respond to these needs and launch a modified regularisation programme for titling in densified katch abadis for rented apartments.
Another efficient way to tackle housing shortages for low-income communities could be to finance incremental building, and extensions, through small loans. Such loans could be linked to median household expenditures on housing to make them affordable. A modified user-assisted transformation model (as used for government housing in the UK) may prove to be highly effective.
The government’s intentions are good, but it must be cognisant of the realities on the ground and admit that the targets of its NPHP may be too ambitious and not fully achievable within the stipulated time. The government will be able to turn the prevailing pessimism into optimism if it significantly adds to the low-cost housing stock, delivers transparently on time and on budget, demonstrates that the business model is sustainable, and meets the location and affordability challenges.
Published in The Express Tribune, December 27th, 2020.
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