So far, we have made three important arguments about the potential pitfalls that the Naya Pakistan Housing Plan (NPHP) will confront. One, that in order to make the program successful, the government will have to maintain some semblance of price stability in construction costs.
The program can only run on prices that are pre-determined by the developer, which can be paid for by the beneficiaries in easy monthly installments, such that the developer also does not lose his commercial viability. However, inflationary pressures, particularly in construction materials, is a dire concern.
This directly relates to affordability as the NPHP—in principal—hopes to address the housing shortage that exists in the low-income segment, and will ultimately increase supply where existing stocks are missing—predominantly for the middle to low income households in the country.
Second, as we have established in our earlier piece, the government will have to provide a subsidy under the pilot project that is currently being run by the Punjab Housing and Town Planning Agency (PHATA) in six locations in Punjab.
The fixed prices for 3 and 5 Marla houses under the project are within the range of Rs1.8 million to Rs4.11 million. Meanwhile, there are three installment plans: in the lowest category, applicants will pay a monthly Rs5,000 to Rs10,000 after a 10 percent initial down-payment; Rs10,001 to Rs15,000 in the middle category and in the highest category, applicants will pay between Rs15,001 to Rs20,000.
Evidently, the applicants will have to opt for a mortgage, because without one, the repayment plan lasts between 6 to 15 years. Will developers wait that long to recover their costs and profits? It seems unlikely. The only product which seems the most affordable is the fixed rate mortgage provided by the House Building Finance Company (HBFC)’s Ghar Pakistan Schemes. This scheme is available for a house price up to Rs4.5 million. The product is for a fixed term of 12 percent along a tenor of 20 years and because it is fixed, applicants will not have to worry about rising interest rates. But as we have estimated, the monthly mortgage payment for most of the houses under the pilot are beyond Rs20,000—the upper limit of our highest installment category.
The government subsidy will have to fill this gap. Unfortunately, this is where a lot of guesswork comes in. We will have to run with averages since we do not know the actual distribution of houses to be constructed in terms of size and housing price, in addition to, how many allottees have chosen which monthly installment plan.
Based on our estimates, using the average housing price, the average mortgage payment under Ghar Pakistan scheme, and the average monthly installment under the NPHP (of Rs15,000, if the PHATA constructs 10,000 in the pilot project), the government will have to pay Rs1.5 billion each year for 20 years.
That adds up! In fact, this subsidy balloons to a mammoth amount every year as more houses are constructed. If the government can construct only 10 percent of the promised 5 million houses, it will be paying nearly Rs80 billion in subsidies every year for the entire duration of the mortgages.
Does Pakistan have this much money? More importantly, will subsequent governments honor the commitment that this government will potentially make during its tenure under their budgets? These are questions that need to be seriously considered.
