Owing to the political turmoil of the last few months and the resumption of the IMF program, the current government has increased interest rates to control inflation, making their monetary policing efforts contractionary.
With rising interest rates and money flowing to saving accounts schemes, people tend to sell their property and deposit in banks. The massive sell-off results in an overall price decline and investor sentiment for the real estate sector.
The rising rates not only slow down the economy but also creates unemployment as a result. Pakistan has observed two real estate booms in the 21st century. The first boom lasted from 2003 to 2006 and the second from 2013 to 2016. The reason for both real estate booms was the record low interest rates at 7.5% and 5.75%, respectively.
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However, the contractionary model may not bear fruit in the long run. Speaking to Jawad Nayyar, Chief Vision Officer at daoproptech.com, a firm striving to digitize the real estate ecosystem in Pakistan, he commented on the current economic measures, “We cannot deny that billions are currently parked in real estate, however increasing deposits by hiking rates is not the long-term solution.
The government should look to digitize this sector as done successfully in countries such as Australia, where PEXA (Property Exchange Australia) maintains a digital national land registry record.
This will also help resolve the plethora of property/inheritance litigations, attract significant dollar-denominated real estate investments from overseas Pakistanis and discourage the parking of ill-gotten capital in nonproductive assets that do not generate economic activity. This also gives the government-wide transparency to introduce tax reforms to discourage parking money and invest in developmental real estate, which benefits the economy”.
With money flowing back to banks, the government can start digitizing all real estate assets and ongoing projects. By bringing developing real estate into the digital framework, monitoring cash movement will be easier for authorities.
Also, note that when the real estate market takes a dip, it also affects the 70+ industries associated with this sector; cement, steel, furniture, and masonry, to name a few. Policymakers should note that these industries are also exporting to this nation. Hence a policy revision will be necessary soon.