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Pakistan’s Real Estate Market: Current Situation In Context With History

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Read Time: 7 mins

The Beginning

The upturn of the real estate sector as an industry in Pakistan was initiated from Karachi. The real estate agencies in Karachi were in existence even before the independence of Pakistan. These few agencies were located at Old Karachi near today’s Bandar Road. There were barons who construct buildings and they hire labors on daily wages. Rarely the selling of plot took place, initially, these deals were of few thousands or few lacs in some rare cases.

The 1950s-1960s

The real estate market started to progress in the 1950s when the areas like Sindhi Muslim Society, PECHS, Nursery, and Tariq Road were becoming populated gradually. In the late years of the 1950s, DHA came into being, and in 1960, plots in DHA gained some boom, but the prices were still very reasonable back then. The allotments of the plot took place against some rupees and they got sold out against a few hundreds. After some time, allotment took place against a few hundreds and deals got finalized against few thousands. By the passage of time, people got aware of the perks and returns of owning properties in the city. People rapidly migrated towards cities from small villages and this trend of Karachi real estate sector had been extensively spread throughout the country. We can say that the real estate market of Karachi’s district South is the nursery of country’s real estate market. District South market, which started to progress in the mid of 1960s, gradually becomes the backbone of Pakistan’s economy. Now the real estate market has developed to an extent where a single construction can spin the wheel of almost 50 industries.

Retrieving the data of initial phases of the real estate market in Pakistan is near to impossible. However, we have the data from the beginning of 1970 taken from some of the most senior real estate agents of the city. This data will help the newcomers of the real estate market. this research will be beneficial for future work and will eventually complement the professional trends of the industry.

The 1970s

The real estate market was normally and steadily progressing from 1970 to 1974. During 1973-1974, when ZA Bhutto introduced Amnesty Scheme, the market boosted. This boom lasted till 1977. The disastrous flood in DHA and post-election riots in the city crashed the real estate market of Karachi.

The 1980s –  The Afghan War Era

The falling graph remained consistent till 1982. When Martial government gradually established its feet and Pakistan become center of focus due to Aghan war. That war brought a lot of financial and moral support for Pakistan from throughout the world. This positivity resulted as the long-lasting boom of the market from 1982 to 1988, until the death of Gen Zia ul Haq in a plane crash. The sudden death of then-President caused the uncertainty in the political scenario of the country which resulted in the crash of the real estate market from 1988 till 1992.

The 1990s

The market began to progress leisurely from 1992 to 1994, but the overall condition was still below average in these years. Real estate market saw its next thrust from 1994 till 1997. The real estate sector passed through a significant development in these four years. In 1997, the disastrous rains, and power crisis caused the fall of the market. The market suffered a recession in 1997 till September 2001.

The 2000s

The real estate market of Pakistan saw its major boom after the 9/11 incident. The upturn of the market after the 9/11 incident broke all the records of its previous peaks. This escalation of real estate market dragged the concept of house ownership far away from a common Pakistani. The massive rise in prices disallowed many genuine buyers to purchase property in the early 2000s. The next recession toppled the market in 2005. This recession long-lasted till June 2010. According to experts, the major reason behind this recession was the sky-high prices of property. The market began mending delicately from July 2010. This mending process got a boom in 2012 which lasted until November 2015. Once again the reason of recession was overpricing. After the slight drop in November 2015, the market once again rosed to break records of past 8,9 years.

Finance Bill 2001 Amendment

On 7th June 2016, the federal government approved the amendment in Finance Bill 2001, this amendment had been made public through advertisements in various newspapers on 28th of June. This development created the howls amongst short-term investors and other people associated with this domain. The reason behind the outcry was the indication made by the government that the market rates of the property will be regularized according to the DC-approved rates in near future. The indication came without any mechanism and proper homework by the government. The attempt was made by federal govt after almost 12 years, and by provincial governments after 6 years. A lot of effort had been made to reduce the gap between market rate and DC rates. The negotiations between government officials and different unions and associations of real estate agents and other professionals of real estate industry resulted as the agreement on 80/20 ratio, where 20% represents documented grey economy and rest of the 80% will be the undocumented black economy.

Role of Short-term Investments

The short-term investment opportunities in Pakistan is flourishing since last 6 years. In fact, the two major factors that include the 9/11 factor and uninterrupted democracy factor since July 2010 until 28th of June 2016, has left the remarkable signs of fruitful short-term investments in the economy of Pakistan. This peak of short-term investment will be beneficial for few in future however many will suffer from it. This shiny market of short-term investment has been created by the disasters made by the ‘economic terrorists’.  Many white-collar businessmen invested their un-tax, unregistered and undocumented money from other businesses to this domain eyeing the lucrative returns. Interestingly, in the six-year period of slackness of business and unproductive short-term investments, the provincial and federal governments deliberately or maybe carelessly did nothing to control the overpricing in the real estate market. The respective governments could have controlled the prices by simply just increasing the DC rates each year moderately. This move by the government could keep the residential property within a reach of a common man at least. Since there was no action made by the government, therefore, the large portion of documented white economy investments fell into the grey economy. Now, the representatives of federation and chamber are seeing it as a threat (earlier, they were worried that people are shifting their investments from production industries to unproductive plots trading, and the money of investors are eventually stuck). In such circumstances, nobody is willing for 20% documented economy at least at the moment. The field plowed by the ‘economic terrorists’ wasn’t adding, in fact, it was multiplying investments. Investments were giving returns each day, each hour, in fact, each moment. Consequently, the market is suffering from inactivity since 28th of June. However, it is yet to see how long this period of inactivity will take before it ends. 

What’s Next?

These 13 rounds of real estate market seem like quite balanced. Comparatively, by the passage of time, the progress of the economy nationally as well as internationally and geographical circumstances have been changed. The real estate trends have been modified in Pakistan particularly in Karachi where the population has been increasing drastically. The boom of the real estate industry, and the unregistered, undocumented and, untaxed investments by white-collar people modified the dynamics of economy and professional behaviors of masses associated with real estate market. However, it is yet to see that whether the market will proceed with its 45-year-old trends or it will deviate its path because of above mention activities. The trends reveal that regardless of any excuse. the core reason behind the recession of the market had always been the overpricing. The patterns of market trends remained the same for the 43 years out of its 69 years. The period between the point of peak in the recession to the point of peak in the boom is essentially consist of 4 to 5 years. The proportion of increment in prices in populated areas is 4 to 5 percent however for unpopulated areas, that is around 9 to 10 percent.

When a recession starts, the prices in populated areas fell from 0.5 to 1 percent and prices of unpopulated areas fell to almost 5% or 50% of the previously increased price. However, apparently, it is difficult for the market to proceed with the same trends anymore. Despite the fact that real estate trends of the country are similar to what they were before but now other external factors have been changed. Therefore, we have to wait and see how market forces will impact the real estate market.

We have come across three different type of opinions on current inactivity of the market.

  1. Some people are convinced on the basis of the previous 69-year track record that there is a fair chance of another recession period of four years. These people believe that even if the government takes U-turn and reverse its decision, the market is not going back on the track anytime sooner.
  2. Some people believe that this trading of plots has turned out to be a stock-like market. Therefore, the recession period would not be long and the market will be stable after a slight correction.
  3.  The third type of people believes that if the government reversed its decision the market will boom endlessly.

We have to wait to look out which opinion will dominate. Each opinion has its own importance but apparently, if we observe history, database research, and the government’s policy to discourage and prevent investment in this domain reflects that the market will follow its 69-year old pattern once again. In fact, if the government continues its policy of white documenting the economy, the recession will become longer and it may turn out to be worst.

Let’s see how far the government will succeed in its effort to bring unregistered, undocumented, and untaxed investments into the white economy. Experts are also keen to asses that what are the negative and positive impacts of these efforts on the real estate market.

The stats we’ve discussed above are related to usual and average plots as in many cases, commercial plots with good geographical location appreciated their worth by thousands of times. A dedicated research for selected areas can reveal this trend as well. Despite the fact that this stats are about a single part of Karachi’s real estate market but this is a historical fact that the real estate market of Pakistan took birth from this vicinity and turned into a service industry by the passage of time. Therefore, this volatility represents the whole country’s real estate market up to an extent.