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Right to Adequate Housing

The relief package that was recently announced by the
Prime Minister for Pakistan’s construction industry would create
more wealth for the wealthy and deprive the poor of housing.

By Dr. Saqib Sharif | August 2020

Real estate is one of the most important sectors in any economy. Policy makers and financial regulators provide many incentives to both investors and borrowers in the real estate sector. The Pakistan Government has announced a big relief package for the construction sector and has given it the full-fledged status of an industry. Financial regulators should now engage with the private sector and financial actors to construct adequate housing for all sections of society in line with the ‘Sustainable Development Goals’ and the ‘New Urban Agenda’ . The financial regulators must tread a path between financialization of housing and the basic human right to adequate housing. The policy makers must ensure that the financial markets and institutions respond to the needs of residents for secure and affordable housing and do not cater only to high net-worth individuals.

In the recent past, it has been observed that financial regulators are not oblivious to a vibrant housing sector that would positively affect the socio-economic environment of the country, with a bigger involvement of the population economically, politically and socially. In 2014, the State Bank of Pakistan issued separate ‘Housing Finance Prudential Regulations’. The housing and construction sector is instrumental in poverty reduction and economic growth as it is labour intensive and has forward and backward linkages with more than forty industries, such as cement, steel, etc. The SBP’s regulations asked the banking institutions to develop a comprehensive housing finance policy in consultation with different stakeholders to create an enabling environment for enhancing the outreach. While going through these prudential regulations it appears that banks in Pakistan can only extend financing facilities to upper-middle or upper income strata of society.

However, with the passage of time, the policy makers realized the fact, in line with the New Urban Agenda, that a shift in paradigm away from prioritizing financial interests and the commodification of housing was the need of the hour to retrieve what housing meant in terms of human dignity and security. Therefore, a new circular was issued by the SBP in March 2019 that provided certain relaxations/exemptions in prudential regulations for low-cost housing finance. Under the new regulations, (a) banks had to maintain a Loan-to-Value ratio of 90:10; (b) banks were exempted from real estate sector exposure limit of 10%; and (c) banks were exempted from the general reserve requirement against the financing extended to low-cost housing. Overall, it can be assumed that financial regulators and policy makers started to realize that extending housing finance to the underserved was important as it was the basic right of every citizen in the country to have access to affordable housing and decent living. This is especially true for countries with no or low social protection benefits. But the realization of the right to adequate housing in the corridors of power is still far from over.

In the U.S., citizens dream to own homes. This allows financial institutions to take excessive risks by providing mortgage loans to households with poor credit history (i.e., sub-prime borrowers). In the mid-nineteenth century, most mortgaged contracts were arranged between individuals, typically with the help of lawyers who brought the lender and obligor together and drew up the papers. Such loans were usually available to socially-connected wealthy individuals. Another example of financialization of housing and exploitation of mortgaged borrowers was observed during the Great Depression in the 1930s. Millions of borrowers were without work and defaulted on their installments. This led to foreclosures and land sales that caused real estate values to plummet. The major reason why so many borrowers were unable to pay was the type of mortgages during that period, i.e., balloon loans, whereby borrowers only paid interest for the first three to five years. Housing was financialized and was valued as a product rather than a human dwelling. It was a means to secure and accumulate capital rather than a place to live in self-esteem, to raise a family and prosper within a community.

During the period between 2003 and 2006, a deep look at the mortgage markets showed that U.S. financial institutions were facilitating individuals to own a decent house by relaxing credit standards to very low or no down payments and promoting NINJA loans (No Income, No Job, and No Assets). This seemed like a tilt towards acquisition of the right to adequate housing. But that was not the case as it were the financial institutions and other allied entities that were making money in the whole process. The rationale for excessive exposure was the mistaken belief that property prices would not decline and the collateral was sufficient to justify the financing. The whole model, prior to the sub-prime mortgage crisis in 2007-08, lacked transparency and provided huge benefits to private markets and financial actors to accumulate wealth at the cost of poor investors – financialization of housing.

In the policy announced by Prime Minister Imran Khan of incentivizing the construction sector, many tax exemptions have been provided to the industries allied to construction activity. The scheme also facilitates wealthy investors to invest in real estate as no questions would be asked about their source of income. The influx of capital may increase property prices to levels that most residents cannot afford. This will happen when housing prices are no longer commensurate with household income levels and are driven by demand for housing assets among investors. Low and sometimes even middle-income residents would be forced out of their communities on gounds of high rent or mortgage costs. Financialization of housing would be witnessed and this will further aggravate inequality and social exclusion. The relief package would create more wealth for the wealthy and deprive the poor of housing and communities.

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