The real estate bubble should burst

ISLAMABAD:

It may sound strange, but it has some logic. To begin with, it is difficult to find an economic justification for such a high level of investment, speculation, fluctuation and activity in real estate in Pakistan.

It appears that the only profitable, or rather economic, activity is investment in real estate and that too mainly in land speculation and new developments rather than in the construction industry.

Most foreign remittances, domestic savings and sometimes even institutional investments are channeled into real estate which apparently offers short term and higher returns but this is a diversion from the sectors productive to unproductive sectors of the economy.

What does the economy as a whole gain from such speculative investments? Rather, it has a huge opportunity cost.

First, if personal savings and foreign remittances are invested in productive sectors such as industry or infrastructure, this would have a positive long-term impact, although short-term returns may be lower.

People are even willing to take out loans, formal and informal, to invest in land in anticipation of quick and high returns.

Second, the speculative real estate sector has attracted a lot of capital which should
otherwise have been deployed in industrial or service sectors.

Many companies have used their working capital and/or concessional financing available for certain industrial sectors to invest in real estate. It makes sense to borrow at 10% below the market rate, thanks to concessional financing, and to repay loans on time without any of the risk associated with normal operations.

Third, more and more institutional investors, both public and private, have channeled their investments into real estate speculation in search of quick and higher returns, thereby redirecting funding that could have been used for more productive sectors. .

There is a need for more housing and real estate developments in Pakistan, but certainly no need for speculation and an overheated market. This situation also leads to an artificial increase in housing prices which creates yet another gap between the haves and the have-nots.

Unexpectedly, the so-called investment in real estate right now is running counter to the supply of much-needed affordable housing. It has become a mere money multiplication channel for those who have it.

It may not be practical to stop investment in real estate, but some of the measures can be adopted to at least stop speculative and unproductive investment.

First, in order to attract retail investors to productive sectors, the government can design financing vehicles that are safe, attractive from a return perspective and targeted to specific projects so that investors can have a sense of contribution to development. national. General bond issuance, such as currently exists, may not serve the purpose.

Second, institutional investors can be regulated by imposing strict limits or quotas on their allocation of funds to real estate investment, particularly if it is not in construction.

Third, existing regulatory instruments such as capital
gains tax must be increased for gains within five years of purchase to manage speculative trading.

Fourth, Real Estate Investment Trusts (RIETs) should be supported and encouraged to provide a better investment vehicle for those interested in this sector. This will also result in more structured investments, via RIETs, in real estate development and will avoid many speculative transactions.

Fifth, major real estate developers should be instructed not to allow so-called plot “file” transactions. It may be even better if the developers only launch the programs when the plots are ready.

Sixth, banks and other financial institutions should keep an eye on working capital or concessional financing deployed in real estate rather than intended use in businesses.

On a realistic note, the points mentioned above can be a wish list because there are many beneficiaries of this housing bubble, including those who should regulate it.

A paradigm shift is not likely through regulatory intervention, but it
seems the market
is ready for self-correction.

The current levels of speculation and overheating of the real estate market are not sustainable. It should burst and will burst. There is no need to worry about this because the impact of such an explosion would only be negative for speculative investors, but would be good news for the economy as a whole, and in particular for the citizens who are genuinely interested in and need affordable and reasonable housing. .

The author is an international economist

Published in The Express Tribune, August 8e2022.

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