Pakistan faces a distinctive challenge in its mortgage market, as the prevailing interest rates for mortgages are significantly high, standing at approximately 24 percent. This rate is notably higher compared to its South Asian counterparts such as Vietnam, Indonesia, and India, where mortgage rates range around 8-9 percent, presenting a stark contrast. The House Building Finance Company (HBFC) research report reveals that more developed Asian economies like Singapore, Japan, and Taiwan enjoy considerably lower mortgage rates, ranging between 2 percent and 4 percent.
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The construction sector in Pakistan, as highlighted in the report, has a substantial outstanding loan amount of approximately Rs. 200 billion. This includes Rs. 35 billion in working capital or short-term loans and Rs. 165 billion in fixed investment or long-term loans. Building construction dominates this sector with a total of Rs. 147 billion, divided between residential construction (Rs. 74 billion) and non-residential construction (Rs. 73 billion). The elevated mortgage rates in Pakistan might be symptomatic of various underlying issues, such as perceived higher risks by lenders, a lack of competitive dynamics within the banking sector, or the impact of inflation on the economy. In contrast, the lower mortgage rates in countries like Taiwan could be indicative of more stable economic conditions, well-established credit markets, and potentially more aggressive monetary policies aimed at fostering homeownership through affordable financing options.
This significant difference in mortgage rates highlights the challenges faced by Pakistan’s housing finance market and emphasizes the need for policy interventions. Measures to reduce financing costs and enhance accessibility for potential borrowers include fostering competition in the banking sector, addressing risk factors leading to high lending rates, and implementing monetary and fiscal policies supporting affordable home financing. These steps are crucial for making homeownership more attainable and stimulating growth in Pakistan’s housing market. The historical trends in Pakistan’s mortgage-to-GDP ratio reveal a consistently subdued performance, remaining below 0.5 percent. Starting at 0.22 percent in fiscal year 2011 (FY11), the ratio dipped to a low of 0.14 percent by FY15. Subsequently, there was a modest uptick, reaching 0.32 percent in FY22, followed by a minor reduction to 0.28 percent in FY23. This pattern suggests an underdeveloped mortgage market over the years, but the recent incremental increase signals the beginnings of a growth trajectory.
Comparatively, Pakistan’s mortgage-to-GDP ratio is notably lower than other Asian economies, such as Malaysia and Thailand, which boast ratios of 44 percent and 20 percent, respectively. This discrepancy underscores the early-stage development of Pakistan’s mortgage market, presenting significant growth potential. Strategic initiatives, including financial reforms and targeted economic policies, are necessary to facilitate credit accessibility and invigorate the housing market, fostering the growth of the nascent mortgage sector.
