Pakistan's high inflation pushing up house prices
Lalaine C. Delmendo | May 18, 2019
Pakistan's high inflation makes it appear that house prices are rising strongly. But it's an illusion. Nationwide house prices, in nominal terms, rose by 5.05% to PKR 10,875 (US$ 77) per square feet (sq. ft) during the year to Q1 2019, according to Pakistan's largest property portal zameen.com. However when adjusted for inflation, house prices actually dropped 3.98% over the same period.Quarter-on-quarter, nationwide house prices rose by a meager 0.95% in Q1 2019 (fell by 2.07% when adjusted for inflation).
In March 2019, Pakistan's inflation stood at 9.4%, up from 8.2% in the previous month and 3.2% in the same period last year, according to the Pakistan Bureau of Statistics (PBS). In fact, it was the highest level recorded since November 2013.
In Pakistan's major cities:
- In Lahore, the average house price was PKR 10,402 (US$ 73) per sq. ft in Q1 2019, up 6.25% from a year earlier, but actually down 2.89% when adjusted for inflation.
- In Karachi, house prices averaged PKR 13,158 (US$ 93) per sq. ft in Q1 2019, up 4.25% from the previous year, but down 4.62% when adjusted for inflation.
- In Islamabad, house prices averaged PKR 9,985 (US$ 70) per sq. ft in Q1 2019, up by 7.01% from a year earlier, but down 2.2% in real terms.
The Pakistani rupee (PKR) lost about 25% of its value against the US dollar in just two years, from PKR 104.804 =US$1 in March 2017 to PKR 139.177 = US$1 in March 2019. The State Bank of Pakistan (SBP), the country's central bank, devalued its currency several times last year, as the government negotiates a bailout with the International Monetary Fund (IMF) to address its ballooning current account and fiscal deficits that threaten to trigger a balance of payments crisis.
So from a US$-based investor's perspective, Pakistan's housing has become cheaper when the recent devaluations of the rupee are taken into consideration.
Despite the country's troubles, the economy grew by a robust 5.2% in 2018, after expanding by 5.4% in 2017, 4.6% in 2016, and 4.1% in both 2014 and 2015, according to the SBP. Economic growth is projected to slow to around 3.9% during the FY2019, according to the Asian Development Bank (ADB).
Foreigners working and living in Pakistan can buy or rent properties. However, the government requires them to complete certain legal formalities with the Board of Investment and the Trade Development Authority of Pakistan.
Analysis
of Pakistan Residential Property Market »
Rental income tax is quite low in Pakistan
Rental Income: Gross rental income is subject to income tax tax at progressive rates, up to 35%.
Capital Gains: Capital gains realized from selling real property held for over four years are not subject to capital gains tax.
Inheritance: There are no inheritance taxes in Pakistan.
Residents: Residents Residents are taxed on their worldwide income at progressive rates, up to 15%.
Buying costs are low in Pakistan
Total transaction costs are around 8% in Pakistan. The buyer pays 4% capital value tax, 2% stamp duty, 1% registration fee, and 1% property transfer tax.
Slowing economic growth; high inflation
The economy grew by a robust 5.2% in 2018, after expansions of 5.4% in 2017, 4.6% in 2016, and 4.1% in both 2014 and 2015, according to the State Bank of Pakistan.However, economic growth is projected to slow around 3.9% during the FY2019, according to the Asian Development Bank (ADB), amidst large budget deficits and external account imbalances.
“Real GDP growth during FY19 is likely to moderate significantly, mainly due to slowdown in the growth of the agriculture sector and stabilization measures taken to preserve macroeconomic stability,” the central bank said.
High inflation is also a concern. In March 2019, Pakistan’s inflation stood at 9.4%, up from 8.2% in the previous month and 3.2% in the same period last year, according to the Pakistan Bureau of Statistics (PBS), amidst rising energy prices and the depreciation of the domestic currency. In fact, it was the highest level recorded since November 2013.
Inflation is expected to be about 6.5% to 7.5% this year, according to the central bank.
“Until macroeconomic imbalances are alleviated, the outlook is for slower growth, higher inflation, pressure on the currency, and heavy external financing needed to maintain even a minimal cushion of foreign exchange reserves,” said the ADB. “Recurrent crises in the balance of payments require that firms become more export competitive.”
Imran Khan's troubled inheritance
Investor confidence in Pakistan has dramatically improved since the Pakistan Tehreek-Insaf (PTI) party, led by Prime Minister Imran Khan, came into power last August 2018. Khan’s predecessor, former PM Nawaz Sharif, was forced to resign after being disqualified over corruption charges. Khan pledged to end corruption and dynastic politics, and introduce economic reforms.
Despite renewed optimism, Pakistan's new Prime Minister has come to power in a country with enormous problems:
- Very poor security situation
- Large and only semi-controllable military
- Large refugee problem, conflict with Afghanistan's Taliban
- Semi-independent regional political establishments
- Worryingly large block of extremist religious opinion
- Ongoing dispute with India over Kashmir
- Poor infrastructure, historic pattern of under-investment
It would be foolhardy to forecast success for Khan. He is an extraordinary figure - English-educated, a star cricketer, a successful ex-chancellor of a UK University (Bradford University), an ex-playboy who in an about-turn became a devout Muslim, a man of peace who has taken the stance of demanding a Pakistani apology for its 1971 massacres in Bangladesh, a proponent of negotiations with the Taliban and with India on Kashmir (which he considers a humanitarian and not a nationalist issue).
Khan has publicly dedicated himself to the struggle against corruption and to liberalising Pakistan's economy. At the same time there is an enormous gap between his own status as a member of the privileged elite and his populist statements identifying himself with ordinary people, statements which invite some scorn from members of his own class. In his personal life he has left a trail of female broken hearts and dissolved relationships, and a reputation for saying one thing one moment and doing something else the next.
In the economy he faces enormous problems. The country’s current account deficit climbed from just US$2.7 billion in 2015 to US$18.2 billion in 2018, amidst ballooning trade deficit due to low exports, coupled with the surge in imports under new China-Pakistan Economic Corridor (CPEC) projects.
Currently, Pakistan’s fiscal and current account deficits both stand at around 6% to 7% of the country’s GDP.
To prevent a balance of payments crisis, Khan has recently stepped up efforts to shore up the country’s foreign exchange reserves and to attract more foreign investments. More specifically, the Pakistani government has secured funding and credit arrangements from China, Saudi Arabia, and the United Arab Emirates.
Moreover, the government is negotiating a bailout package worth about US$6 billion with the IMF, in order to meet its external debt obligations. About 30.7% of Pakistan’s government expenditures are allocated for debt servicing, which cannot be supported by its decreasing revenues.
During the FY2018, Pakistan’s gross public debt reached US$179.8 billion, increasing by US$25.2 billion within a year. The previous government can be partly blamed for its focus on import-led growth strategy to finance large-scale projects under CPEC.