The recent housing finance scheme being offered by the State Bank of Pakistan may be a once in a lifetime chance for a common citizen to climb the housing ladder.
The intent of this scheme was to give a much-needed stimulus to the construction sector and to increase home ownership rates (part of broader plan to increase the middle class). This scheme certainly builds up to be a “win-win” for the masses, the government, and the business community.
To quote Dr Hafeez Pasha (a renowned economist) “This is the first time we have negative real interest rates since the 1950s”. Take into perspective that you are literally being paid to borrow money. The State Bank has further subsidized the cost of borrowing for mortgages so heavily that it seems untrue.
Taking my base case, people who qualify for tier 1 – a property assessed can be worth a maximum of 3.5 million PKR and must have an area of less than and equal to 125 square yards. The maximum loan amount that could be attained after the banks credit analysis of applicant is 2.8 million PKR.
Now I will list down all the benefits of this scheme. The interest rate being offered on this loan is 5 percent, the discount rate currently stands at 7 percent and the current inflation rate is around 9 percent. The borrower enjoys a positive yield of 400 basis point on the principal he/she borrowed, hence the more the amount borrowed, the better. This is a fixed rate loan with a 5 percent markup for the first 5 years and 7 percent for the next five years. This is the first time in the history of Pakistan a fixed rate loan of such a lengthy tenure is being offered and that too, at a markup lower than the discount rate.
There is speculation in the market that the discount rate might be revised upwards to 9.25 percent by mid-year. The construction cost attributes most to the price of the housing unit in this price bracket. The construction cost of housing is not going to get cheaper any time sooner. The supply chain disruption, unparalleled demand by China, a housing boom globally in first world nations doesn’t add up well for housing.
Most commodities used for construction have gone significantly up in value most notably copper, iron, steel, and timber. Add on to that the cost of freight which has more than doubled recently, importing these raw materials now comes at a greater cost.
The demand for housing in big cities outstrips the supply and you can bet that price appreciation of this asset would be comfortably above the rate of inflation. Needless to say, this is the greatest opportunity a common man could capitalize on right now.
