Forthcoming budget and the housing policy

By Alauddin Masood

Pakistan’s housing deficit has swelled to over seven million units although building of units are adding some 500,000 houses annually, Advisor to Prime Minister on Finance Shaukat Tarin has indicated plans to impose income tax on the real estate in the budget for the fiscal year 2009-2010 in a bid to increase the tax to GDP ratio. However, he ruled out inclusion of agriculture sector in the tax net for at least two years, saying “We would first increase the farmers’ income and then levy income tax.”

Pakistan requires a little over half-a-million new houses every year to cater to the needs of the citizens, but only 200,000 houses are normally constructed in the country during a year’s time, with the exception of last two years when the number slightly increased. If the pace of galloping deficit is not contained, estimates suggest that the shortage will rise to a million houses in the not too distant future. This will affect badly the life of citizens wanting a shelter of their own over their heads. Looking from another angle, even the people in the middle income group now find it hard to afford decent accommodation in major cities, including the federal capital Islamabad. In fact, forced by circumstances, some people working in Islamabad are constrained to live either in Rawalpindi or in areas adjoining to the capital city and commute daily from their house to the work place and back. The group also includes people, who have been living in Islamabad for the last two or three decades, but had to find residential accommodation elsewhere because of paucity of houses and the high rents. The two-way journey not only consumes a lot of their time, but the increase in traffic also raises pressure on many roads.

In 1998, the housing backlog stood at 4.30 million units, but it has increased since then due to a number of factors, including population growth, lukewarm approach to bridge the ever rising housing deficit, migration from rural to urban areas and break-up of the traditional joint-family system.

The ever-widening housing deficit has resulted in mushroom growth of squatter colonies and slum localities, particularly in main urban centres and metropolitan towns where many families are constrained to live in one-room shanty lodges. Generally, slum-dwellers face many obstacles, which deny them a permanent and decent shelter with a minimum of basic amenities, like water, sanitation, electricity, gas, drainage and above all proper health care and education facilities. As such the slum-dwellers are forced to live in sub-human conditions in over-crowded localities. According to a conservative estimate, over 20 per cent of Pakistan’s urban population lives in slum areas, which are devoid of basic civic amenities.

With the exception of Shaukat Aziz administration, post 1988 no government in Pakistan made any serious effort to arrest the widening gap between the demand and supply of houses in the country. Earlier, in 1985, Junejo government made serious efforts to addressing the housing deficit when it announced a housing policy aimed at catering the housing needs of the citizens, particularly the middle and lower income groups.

Some salient features of Junejo’s 4-year plan included: (1) free distribution of 2.2 million seven marla plots among the poor shelterless people of rural areas; (2) free distribution of three marla plots to the destitute people in urban centers; (3) allotment of three marla plots to the shelterless people in urban centers at nominal rates; (4) construction of one million houses for the shelterless poor people in the country, including 20,000 rural and 15,000 urban houses in each province; (5) development of townships at all district headquarters; (6) allotment of 10,000 small plots, ranging from 90 square yards to 140 square yards, to the low paid government employees in Islamabad; and, development/regularisation of pre-March 23, 1985 Katchi Abadis and handing over proprietary rights to their legitimate owners.

After Junejo government’s dismissal, the establishment and the bureaucracy circumvented the housing policy so as to accommodate the elite at the cost of middle and lower-middle sections of the society with the result that the housing problem has continued to grow, both in size and dimensions over the years. Resultantly, against a shortfall of 2.8 million houses in the mid-80s, the country now faces a deficit of over seven million housing units.

Meanwhile, Shaukat Aziz administration thought it prudent to allot more than one residential plot to the federal secretaries in Islamabad. In the past, government employees were allotted only one residential plot in the whole of Pakistan. However, a section of the establishment manipulated things in a way that they could obtain a couple of pieces of land in official housing schemes in various parts of the country.

Considered as one of the main drivers of economic growth, the construction and housing industry accounts for 10 to 12 per cent of GDP and seven per cent of employment globally. While it can become the biggest creator of jobs, it can also engage some 40 supporting industries, thus creating demand for growth of economy on the one hand and alleviating poverty on the other.

Recognising the gravity of housing situation and the potential of housing and construction industry as productive sectors of economy, Shaukat Aziz administration declared this sector as a priority industry. Aziz administration also formulated a national housing policy for accelerating housing activity aimed at employment generation and economic development. The policy was designed to facilitate provision of housing inputs like land, finance and building materials.

On June 8, 2005, the concerned authorities informed the National Security Council that the housing sector envisaged construction of over three million low-cost houses to partially meet the shortfall at an estimated investment of 900 billion rupees over the next five years. To give a boost to the housing sector, the government enhanced the house financing by banks to 10 per cent from the previous five per cent of net advances, while maximum loan limit was also increased to Rs10 million from Rs5 million, debt-equity ratio from 70:30 to 80:20 and loan tenure from 15 years to 20 years.

Taking cognizance of the galloping deficit, Aziz administration also constituted an Advisory Board on Housing and Infrastructure. Chairing Board’s meeting in Islamabad on November 23, 2007, Secretary Board of Investment, Mushtaq Malik said that the aim of the Board meeting was to address the issues faced by the private sector builders of housing units and to forward recommendations to the authorities, aimed at speeding-up construction of new housing units.

The policy measures introduced by Shaukat Aziz administration did succeed in attracting the private investors, including some foreign builders, to the real estate sector. This gave a ray of hope to the shelterless people, who started dreaming about owning a house.

Since the housing deficit is enormous; it requires mammoth efforts to bridge the gap between the demand and supply. However, it is apprehended that the new tax measures, as indicated by the Prime Minister’s Advisor on Finance, may retard the pace of construction in the country, aggravating the housing deficit, overall employment position and the miseries of the hapless citizens.

Furthermore, the real estate sector is already paying substantial taxes in the shape of property tax to the provincial and local governments. Therefore, it needs to be ensured that any new levy does not slow down the pace of construction and affect the overall pace of economic activities in the country.

It may be noted that hundred thousands of workers in the country sustain themselves on the construction industry, which also supports over three dozen other industries. Hence the authorities need to ensure that the proposed new tax on the real estate does not slow down the pace of construction activities in the country.