Real es­tate bub­ble

The Pak Banker - - EDITORIAL - Moaz­zam Hu­sain

The ques­tion in many peo­ple's minds over the Eid hol­i­days was what was go­ing to hap­pen to prop­erty prices go­ing for­ward. The pre­ced­ing week, an im­por­tant amend­ment had been made in the in­come tax rules whereby prop­erty val­u­a­tions, for pur­poses of tax, would be de­ter­mined not by the pro­vin­cial gov­ern­ments but by val­uers ap­pointed by the State Bank of Pak­istan.

Val­ues would be de­ter­mined at mar­ket prices in­stead of the his­tor­i­cally low doc­u­mented prices that ap­pear in trans­fer deeds and reg­is­tra­tion doc­u­ments.

What this means is that at the time of a trans­ac­tion, the seller would have to ap­proach a nom­i­nated valuer and get the prop­erty price as­sessed. The trans­ac­tion would then get recorded in the reg­is­ter at no less than this as­sessed price.

That prop­erty prices are un­der­val­ued - in some areas hugely while in oth­ers only marginally - is an open se­cret. This has cre­ated a colos­sal black econ­omy and where un­doc­u­mented wealth, of­ten from du­bi­ous sources, finds a tax haven. The money so in­vested does not pro­duc­tively con­trib­ute to any eco­nomic ac­tiv­ity. It cre­ates an ar­ti­fi­cial bub­ble in prices and fu­els spec­u­la­tion.

Bona fide projects of­fer­ing above mar­ket re­turns were hav­ing trou­ble at­tract­ing in­vestors when so much 'funny money' was be­ing made in real es­tate spec­u­la­tion over these last four or so years. So it was with all this in mind that in May this year I had sub­mit­ted a rec­om­men­da­tion for the Fed­eral Bud­get 2016-17 - a one liner that read "please get money out of prop­erty and chan­nelised to­wards more pro­duc­tive eco­nomic en­deav­ours". Where po­ten­tial buy­ers will take their money is any­body's guess.

Now the new rules are look­ing to ad­dress this and grad­u­ally bring this money into the tax net. That this was go­ing to neg­a­tively af­fect prop­erty prices was a fore­gone con­clu­sion. The ques­tion in ev­ery­body's mind was: By how much? That an­swer would ap­pear to de­pend on two things: one, the sin­cer­ity of pur­pose with which the gov­ern­ment now fol­lows through with im­ple­ment­ing the mech­a­nism. In other words, how wa­ter­tight and in­cor­rupt­ible it makes the process. Two, the price ero­sion on each prop­erty will be in di­rect pro­por­tion to the ex­tent to which it has been un­der­val­ued in the reg­is­ter. Fi­nally, how and over what time pe­riod would this ero­sion play out? Just as dur­ing times of a spec­u­la­tive boom, an ex­pec­ta­tion of higher fu­ture prices sees buy­ers scur­ry­ing to make a quick gain be­fore dump­ing it on the next buyer, in a pre­lude to a slump the op­po­site hap­pens. To be­gin with, many po­ten­tial buy­ers would not have the full amount equiv­a­lent in 'white money' with which to pay the prop­erty's mar­ket price. On top of that, since many buy­ers were in it for spec­u­la­tive gain only, and not for any gen­uine need, and now all of a sud­den that this no longer seems pos­si­ble, many of them would evap­o­rate. That would mean fewer buy­ers. Where po­ten­tial buy­ers will now take their money is any­body's guess. My hunch is they would look to­wards other av­enues of spec­u­la­tive in­vest­ment of which there aren't very many. But they should not be of any con­cern in our cal­cu­la­tions. In­stead, the big op­por­tu­nity is that if the rules are im­ple­mented as they are in­tended, then all in­vest­ment that is cur­rently held in prop­erty as­sets be­comes doc­u­mented, in other words 'white money', and from here it can move and find other av­enues of pro­duc­tive in­vest­ment in other parts of the econ­omy. That is a good thing, al­though the process is likely to be a long-drawn one as sellers would be in no hurry to sell in a de­clin­ing mar­ket, ex­cept those who per­haps need the cash ur­gently or had in­vested bor­rowed money. In this way it may be at least another 12 months be­fore the mar­ket ar­rives at a new equilib­rium.

Mean­time, is there any­thing more the gov­ern­ment can do? Here's an idea: A dis­pro­por­tion­ate amount of Pak­istan's wealth is held in real es­tate as­sets. Pro­gres­sive economies need new busi­ness start-ups, grow­ing emerg­ing busi­nesses and com­mer- cial­i­sa­tion of in­no­va­tive ideas. The State Bank has an op­por­tu­nity to now spur the de­vel­op­ment of al­ter­nate as­set classes such as ven­ture cap­i­tal funds, pri­vate eq­uity and in­vest­ment funds. Ad­di­tion­ally, in­for­ma­tion mem­o­ran­dums con­tain­ing busi­ness and pro­ject in­vest­ment op­por­tu­ni­ties, on which some prior due dili­gence has been con­ducted by the State Bank or its nom­i­nated agency, can be show­cased to in­sti­tu­tional and in­di­vid­ual in­vestors. Even a cap­i­tal gains tax waiver may be of­fered as an in­duce­ment. With some imag­i­na­tion, money can be in­duced out of prop­erty and chan­nelised to­wards pro­duc­tive eco­nomic en­deav­ours that would deepen cap­i­tal mar­kets, spur eco­nomic growth and re­sult in job cre­ation. -

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