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People cannot be coerced into exporting goods, especially if the incentives lie in the passive real estate sector


Real-estate is a major avenue for investment in Pakistan and, in terms of returns, has beaten almost all other asset classes. Houses have shown a compound return of almost 13% over the last 10 years, according to the House Price Index. The last two years have seen a compounded return of almost 18%.

The drivers of demand for real-estate in Pakistan are slightly different than the global drivers.

It is not realistic to think that the rising price of houses is the result of a rise in consumption. Consumption may be one of the drivers here, but it is not the most important. Why do I say something like that? In response to contractionary monetary and fiscal policies, consumption in Pakistan has started to diminish. Real-estate prices have not budged despite a noticeable dip in car sales and gasoline consumption.

Five years ago, I wrote an article in this newspaper in which I compared the real estate hub of Pakistan, Karachi, to other metropolitan cities. Pakistan’s real-estate sector seemed to have peaked in view of the traditional demand-side indicators, such as rent-to-price ratio and salary-to-rent ratio. This did not happen to me to my astonishment. The best explanation of my situation can be found in a verse from Ghalib.

“Thee khabar garm ke Ghalib ke urenge purze,

Dekhne hum bhi gae thay, par tamasha na hua”

(It was big news that pieces of Ghalib’s body were going to be taken apart,

Pakistan’s real-estate bubble never burst as predicted and I was among those waiting to watch, but the predicted circus-act never took place.

The real-estate bubble didn’t burst, but why did the Tamansha not place? In Pakistan, consumption is not the primary driver of real-estate demand.

Surplus funds parked in this sector by the more affluent classes of society are the reason for real-estate demand. It has become very difficult to take money out of the country because of the Financial Action Task Force conditions. Those popular destinations are grappling with money-laundering issues and are usually used by Pakistan to hide their financial surplus. The funds that are unable to find a way out of Pakistan have found a place in the real-estate market.

If Mr A wanted to park funds in real-state so he could purchase a plot of land from Mr B, what would Mr B do now? Will he use the money to invest in his own company or will he use it to purchase shares in his company?

No, he does not do that sort of thing. He buys another plot of land because he wants to make more profit. The chain seems to be going on for a long time.

Pakistan’s real-estate refuels itself, becoming more and more profitable for those who can afford it. Kevin Spacey said in a movie that land is a limited resource and in Pakistan, a finite amount of land is chase by an apparently infinite number of buyers. The money being offered for plots is growing by leaps and bounds, despite the fact that these buyers and sellers manage to increase their investment every few years. There isn’t a lot of supply, however. This limited supply causes the prices to go up again and again.

There is no end in sight for the boom if the economic policies stay the same. Black money can be turned into white cash by investing in property market investments. This is an important driver for real-estate as at least 40% of Pakistan’s economy is not documented, hence, huge sums of money are routed through this avenue.

So, then what’s the problem with this?

The problem with getting on this self-refuelling real-estate bandwagon is that it is diminishing the productive potential in the country. When you can double the money in a few years playing golf, why would anyone want to export goods that are critical to our economic survival?

The tax laws governing this area make it possible for real-estate barons to pay infinitely less taxes than they would in the corporate sector. This acts as an incentive in favor of the real-estate band wagon and also results in the government not being able to collect the required amount of tax.

Men are motivated by incentives. You cannot force them to export goods, especially if they are living in the passive real estate sector.

In the next few years there will be an oversupply of homes, which means there will be a fall in home prices.

Pakistan’s balance-of-payments crisis is a result of the lack of incentives offered in other lucrative, productive businesses.

Economists have developed a nudging theory that can be used to turn a situation involving a selfish individual into one where everyone is better off.

Incentives must be created to ensure that surplus capital flows through efficient businesses. You should always establish incentives for your business, especially for export.

Exports are a potential solution for Pakistan. An increase in exports would help to boost the economy, and could lead to a recovery.

Pakistan has had its ups and downs over the past few years, but it can only avoid another economic meltdown if it stops the country’s current real-estate trend.

The writer is a banker and teaches economics

Published in The Express Tribune, November 14th, 2022.

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