Residential construction to make room for economic boom
Currently residential construction industry simply looks smashing as alongside infrastructure development more and more residential construction projects are getting off the ground; however the cost of owning a roof is so high that only moneyed class can afford it.
In the statistic census held in 1998 the housing stock in Pakistan was 19.21 million, while in the census of 2017, the housing stock increased to 32.2 million. The occupancy rate in 1998 was 3.3 people per room or 6.6 people per house but last year’s census showed it has slightly reduced to 6.42 per house. The global norm in this regard is 2 people per room or 4 people per house.
In order to reach the global standards Pakistan faces a housing deficit of over 18 million. Our population is increasing at a rate of 4.8 million/annum. This brings the incremental needs of houses at 747663 units a year — at an occupancy rate of 6.42 persons per unit. We are already facing a deficit of 18 million and are not building more than 45,000 houses per year.
This way we are creating additional shortage of 300,000 housing units every year over and above the already accumulated deficit. With present policies in place, it seems impossible to plug the housing shortage in the near future. In the most of the country residential growth is linear, which means each family that owns a house has constructed either the ground or the first floor.
The same land could be utilised if vertical growth is facilitated. Instead of a floor or two, facilities should be provided to build seven to 10 floor apartments that could accommodate ten times more people on the same piece of land.
The vertical growth in the shape of apartments and plazas in large cities of Pakistan would make the big cities more manageable. To some extent Karachi is seeing such growth as organised property developers are offering low cost flats to the less affluent segments of society on affordable installment.
With rise in property rates multistory flats are coming up even in the high-end areas like Defense Housing Society in both Karachi and Lahore. Vertical construction would limit the geographical expansion of the cities.
However it should be in strict compliance with the building laws. We have seen massive disaster in October 2005 earthquake in Islamabad where a big housing complex caved in due to noncompliance with the laws while similar high-rise structures in the city survived.
All the housing activity in the country nets the government 25 percent of the construction cost as taxes. There is 16 percent sales tax on all construction and finishing materials like cement, bricks, paints, electrical wiring, sanitary ware, electric fixtures, lightings, and other finishing accessories.
The rich can bear these taxes but most of the housing deficit is among the poorer segments of society that need a softer approach as far as construction related taxes are concerned.
The government should facilitate private sector developers on commercially sustainable basis for constructing low cost houses ranging from Rs1.5 million to Rs2.0 million in the form of high rise apartments. These builders pay 6 percent withholding tax when they sell their houses or apartments besides paying 2 percent CVT and stamp duty.
Thus the cumulative taxes the government gets on construction of a house are more than 25 percent of the cost. The government should ensure subsidised residential construction loan to buyers of small and medium houses/apartments. At least 5 percent subsidy on mark-up would facilitate aspirants to acquire low-end houses.
The state should also ensure financing of up to 40 percent of the cost of the house. This facilitation alone would increase construction activities substantially. The 5 percent subsidy on the cost of an average Rs3.5 million house would mean an interest subsidy of Rs50,000 per annum.
Addition construction of 300,000 houses would create Rs1050 billion worth of economic activities. The residential construction activity would generate a revenue to the tune of Rs750 billion as the remaining amount would be the cost of the land. The government would get 25 percent of it as taxes worth Rs187.5 billion. By parting with Rs50,000 mark-up subsidy per house (Rs15 billion on 300,000 units) the government would get an additional Rs172.5 billion as taxes plus recurring property tax and wealth tax. The whole activity would boost the GDP growth by over 2 percent.