Banks mortgage financing steady despite low interest rates

Pakistan commercial banks, conventional and Islamic banks contribution to rebounding real estate sector is below expectation but remained study with merely Rs 2.1 billion advances were received by builders and consumers on the account of mortgage financing. According to State Bank of Pakistan (SBP) statistics, the advances of banking industry to real estate sector grew to Rs 54.4 billion by end of December 2015 as compared with Rs 52.3 stood by end of 2014 showing a yearly growth of 4 percent despite of the fact the interest rates are historical low in Pakistan.

Pakistan's real estate sector has been considered as haven for investors during 2015 as commodity prices collapsed and local stock market returned only 2.1%. In this scenario, the real estate market as measured up in double digits in three major metropolitan areas, that is, Karachi, Lahore and Islamabad as showed by research wing of Zameen.com.

Accordingly,. Karachi, Pakistan's largest metropolitan area outperformed Lahore and Islamabad where prices of 500 and 250 yard plots were up on average by 25%. DHA City prices were up on average by 67% while Bahria Town fell by 14% during 2015 due to some investor concerns though development works in Bahria Town continue. Lahore, the second largest metropolitan area, provided good returns, where 500 and 250 yard plots were up on average by 8% during 2015. Contrary to Bahria Town's performance in Karachi, Bahria Town Lahore was up by significant 14% while DHA Lahore remained more or less flat during 2015.

Islamabad real estate provided returns in line with Lahore, where prices of 500 yards and 250 yards were up on average by 7.5%. Sector F-11 provided highest return and was up on average by 13.5% while Bahria Town prices remained more or less flat. During 2014, Bahria Town provided significant negative returns of 23%. This underperformance of Bahria Town is because of extraordinary price escalation that it witnessed during 2013 where prices of plots were up by over 100%, the research report said.

The trend signals ample cash liquidity cou- pled with investors' confidence in the economy but the contribution of the banking system is minimal towards the booming sector.

According to SBP data, the weighted average interest rates of different banks fall from 9.5 percent to 13 percent depending on the amount and period of advances and financing which shows that boom in the property market was fueled by cash reserves of the individuals in the undocumented cash economy rather than banking system. All the three metropolitan areas of the country have provided phenomenal returns to investors with Karachi outperforming both Lahore and Islamabad since 2011.

Average plot prices in Karachi have increased by 250% since January 2011, while plot prices in Lahore and Islamabad are up by 153% and 146% respectively. This shows that rising property price trend is not a short term phenomenon as it has been sustained over a longer period of more than five years.

Commercial banks should revamp strategy of consumers banking to attract consumers to enhance their contribution to the real estate and construction sector which will not only stir the economy but it will generate employment in different associated sectors such as cement, steel, paint and etc,.

The government should also design mega low-housing projects in different cities to attract consumers for availing of their need of housing through easy loans. According to an estimate, the number of shortage of nearly 9 million housing units is persisting in Pakistan.