KARACHI: Housing financing is not only half a percent of the country’s GDP (gross domestic product) but the signs are encouraging, a senior Islamic banker said Monday.
“Housing financing was nearly Rs1 billion six months ago, but now it’s around Rs3 billion a month,” said Jahanzaib Saeed of Dubai Islamic Bank, speaking at the online session.
The virtual discussion entitled “Islamic Home Finance – Way Forward” was organized by the IBA Center of Excellence in Islamic Finance.
“Although still low but growing, Prime Minister Imran Khan seems eager to fulfill his election promise and the State Bank of Pakistan makes it more conducive for the bank to operate.” Changes in regulations, incentives and oversight are fixing and pushing the cracked wheels, Saeed said.
“These low figures suggest that housing is never on the radar of conventional banks because of the demand for low interest-based mortgages,” he said adding that even though Islamic banks have changed this perception.
Saeed said the surge in the past six months was mainly due to Islamic home financing. “Even traditional banks offer housing finance through their Islamic windows.”
He said in Islamic financing mode, a property is jointly bought by a customer and a bank, adding that “the customer pays rent to use the property every month he too.
buy property from stock bank every month until he gets full ownership ”. “If it is halal, we will take it,” said the IFC survey results and shared at the session of Zaigham Rizvi, a housing finance expert.
“It is understood that reaching this segment they are undocumented but the IFC has developed guidelines for the assessment of their income and for clubbing family income,” said Rizvi. He called on the central bank to develop paper-based guidelines for banks in that path.
Rizvi said that this segment was the target of the PM’s initiative.
Imran Ahmed, Additional Director of Financial Development at SBP said, “The central bank requires banks to maintain a 5 percent equivalent of their private sector loan portfolio for housing by the end of 2021”.
“Banks are also required to set quarterly targets and to achieve that it is permissible to keep cash reserves lower.”
In addition, Ahmed said the bank was waived at the 10 percent exposure limit if it was reserved for housing. In addition to regulatory changes, the SBP has introduced a refinancing scheme and new tiers were added to provide housing microfinance loans under the previous arrangement, he said.
“SBP is shopping for mysteries to measure performance. It created a markup subsidy complaint portal and set up a help desk for customers, ”added Ahmed. Sohail Baig, CEO of Emaar, said that the regulatory environment is important, although there is still much to be done.
Baig suggests reviewing credit limits, down payments, rate structures, documentation, and processing. For him cumbersome documentation and early payment penalties required a return visit. He also suggested that tax incentives for new home buyers would speed up deliveries.
The government will allocate nearly $ 4 billion into a scheme to accelerate the pace of new housing construction, which it hopes will help see “tens of thousands” of new properties built.
Economists like to talk about “optimal policy instruments” – in essence, policies that achieve their objectives more effectively or efficiently than alternatives, and have minimal undesirable consequences.
Judging by these criteria, the package of housing policy instruments recently announced by the New Zealand Government is still far from optimal. You might even call it messy.
How? For those who are uninformed, a key element of the package can solve the housing affordability crisis by doing a number of things:
• removing tax deductions on loan interest for residential property investments • expand bright line test – the period after the sale of the property attracts capital gains tax (CGT) – from five to 10 years • support new buildings under this tax change • introducing a “change of use” rule that effectively makes the family home the responsibility of CGT if it is sold within 10 years and leased for more than one year • increase incomes and limit housing prices to the Government First House Grants scheme.
However, if we examine the package against the three optimal policy requirements, we can see the problem.
Achieve policy objectives
Economists have a policy “rule” that in order to achieve a variety of policy objectives, you need at least as many policy instruments. Housing packages are a mixture of actions that are interrelated, but have several explicit purposes:
• stabilizes house prices • facilitate home ownership • discouraging speculative investments (unclear) • increased the supply of housing with mostly (unspecified) “affordable housing” • closing what the Government claims is a housing “tax loophole”.
To this, add an implicit goal of addressing the perceived inequality of income and wealth between tenants, landlords and homeowners.
Overall, it is a daunting task, and it would be great if the housing policy suite could achieve such broad objectives.
Arguably, the main target of this policy package is to stop the inevitable increase in house prices (especially in Auckland). Failure to achieve it will only place it among a long line of efforts by the previous government (National and Labor) for at least the last 20 years.
In all cases, the biggest problem is a lack of political commitment to increasing the housing supply.
All taxes cause “distortions”, mostly unintentional, that need to be reduced. Moreover, policies that have conflicting goals are “incoherent” and are usually among the most deviant. This applies to the elimination of reduced interest from housing packages.
Previously, in New Zealand and nearly every other country, interest on business loans was treated as a legal expense and therefore tax deductible, regardless of the nature of the business.
With a coherent principle that currently doesn’t apply to housing, then what about other types of business loans that the government thinks should be liked or disliked?
No doubt arguments can be made for such a policy, but the result is an ad-hoc tax system that produces many unwanted distortions and harmful incentives.
It could be argued that the “new building” aspect of the housing package received several incentives by directing rental housing investment to increase housing stock.
But given the existing constraints to new housing construction – such as planning regulations and suitable land availability – the policies are likely to have little impact. This will only divert real estate investors from competing with first-time buyers for existing properties to competing with them for new property.
Over time, the inventory of rental housing becomes a mix of homes that meet or do not qualify for tax exemptions. Taking advantage of these new loopholes and various distortions in property prices will likely provide tax accountants with a lot of jobs.
Back door capital gains tax
It is rare to find transaction-based and time-based obligations among the principles of sound taxation policy. But a bright-line test manages both – it prompts postponement of property sales to evade taxes even when the reverse sale would be in the taxpayer’s best interest.
It was originally introduced in 2010 with a two-year threshold, without supporting evidence, that should stop so-called speculators from flipping properties for quick profits. The 10-year threshold cannot be labeled as an anti-speculation policy, it is simply a back door capital gains tax (CGT).
Like most back door policies, this CGT is bound to be less transparent and coherent than policies designed to deal with problems head-on.
Consider the case of a hypothetical Auckland home owner who moved to Sydney to work for two years. It doesn’t make sense to sell a home in Auckland because of high transaction costs and the risk of slipping on the property ladder when trying to buy back later. It is much better to rent in Sydney while also renting a house in Auckland.
But this will now generate a potentially large tax bill on the family home. Indeed, one calculation suggests such a plausible scenario could result in a CGT obligation of nearly one year of salary – only to move into a house for the same price.
Alternative policy instruments
If a better alternative exists, it does not lie in more ad-hoc tinkering with a coherent tax regime.
Conversely, like the famous real estate mantra of “location, location, location”, the mantra for New Zealand’s housing policy must be “supply, supply, supply”. In particular, supply in Auckland.
Successive governments have adopted national policies at a time when rapid house price inflation is almost exclusively urban and is essentially an Auckland phenomenon.
Without policies reforming construction sector regulations and opening up more land for urban housing, it is unlikely that housing prices in Auckland will stabilize while demand-driven trends remain.
Worse, the Government’s first home buyer scheme would only increase demand without incentivizing supply.
With too many goals and possibly many unintended consequences, the Government’s housing policy risks being grossly incoherent.
Norman Gemmell is chair of public finance at Te Herenga Waka – Victoria University of Wellington.
At its core, New Zealand’s Aotearoa housing crisis is not about homes, but about how we think about wealth, our communities, ourselves and our neighbors, the economy, the education system and more. The only solution to this problem involves everyone.
How We Live – Creating Housing That Puts People and the Planet First is report led by sustainability and ethical business champions MOTIF Agency and commissioned by PIF Foundation, and represents a jointly created response to concerns for Aotearoa’s housing ecosystem in the aftermath of the COVID-19 crisis.
Ben Preston, How We Live The co-author, says: “This is a problem of complexity and one that we will solve now if the existing approaches and understanding are adequate.
“Our report provides a starting point to accelerate Collective Housing sector in New Zealand and we want to create a platform for sustainable dialogue via our website: www.howwelive.co.nz, ”Said Ben Preston.
Build 2020 Counterfutures issue in housing, How We Live researchers have adopted the term ‘Collective Housing’ to grasp the overarching intent of getting away ‘build a house’, towards a holistic model that enables the community to actively participate in co-creation of the home that regenerates its spirit and environment.
Vision How We Live is that by 2030, all New Zealanders live in communities they feel connected to, in deep connection with the lands and natural environments in which they are supported.
Helmut Modlik, CEO Ngati Toa, said: “New Zealanders are reminded in 2020 of the truth of the Māori saying. My heroes are not individual heroes, but individual heroes! ‘My strength is not from one warrior but many!’
“While the influential leadership of our Prime Minister is key, it is the unified strength of New Zealand’s ‘5 million team’ that beat the pandemic. We did it then, and we can do it again and beat the curse of homelessness among our people. Kia kaha, kia maia, kia manawanui! “
This research paves the way for sustainable solutions that can be found and rediscovered as the situation evolves over time. More than that, How We Live aims to catalyze a cross-sectional approach to honestly identify the complex and interrelated factors behind the Aotearoa housing crisis, recognizing that it is linked to issues of affordability, rapid population growth, legislative and regulatory challenges and detrimental impacts on the environment.
That How We Live
the report will be followed by a practical guide – How We Live Workbook. This guide allows those wishing to take a different path to share their journey and learn from those already on that path. Basically, it’s a blueprint for actualizing a Collective Housing project, complemented by step-by-step guides and a knowledge-sharing library.
Definition of Collective Housing: Collective Housing is a term that encompasses a variety of community-focused housing development approaches that promote community and environmental well-being. The four terms we include in this term are: Cooperative Ownership, Community Land Trust, Papakāinga and Joint Housing (which are only one Collective Housing forms with special development designs and patterns).
Please join us for the launch event at How We Live stand (stall # 126) at Newtown Festival, 12-2pm on Sunday 11 April 2021.
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KARACHI: The Sindh government has said that the Shaheed Benazir Bhutto Municipal Scheme (SBBTS) under construction is intended to provide 50,000 plots of 120 square yards each in 23 districts in the province to poor people. Presiding over Tuesday’s meeting, Sindh Regional Government Secretary Syed Najam Ahmed Shah said the SBBTS would be a valuable gift for the masses of the province. He directed the officials concerned to accelerate the pace of construction work to complete housing projects in several cities at the earliest. The total project cost is Rs 9421 million. The regional government secretary said in the first phase the SBBTS project will be completed in Karachi and Hyderabad. He directed the officials concerned to carry out development work in order to complete the SBBTS in a very transparent and high quality manner. He says indolence will not be tolerated in this.
He said a comprehensive strategy must be adopted to ensure the supply of electricity, natural gas, water supply and sewerage at SBBTS because the tender process will be completed at the earliest. Funding for future housing projects must be guaranteed without interruption, he added.
IT professional Brendon Miszka and his wife Gauri are inspecting a house in Sydney’s northwest suburb.
They wanted to buy their first home but, despite the good work and decent deposit, they found it difficult.
“I think we are competing with a lot of people who would prefer to take more risks,” Brendon told me.
“There’s a general attitude that you go to the bank and see what the maximum amount the bank is willing to lend me and then go out and try to spend all that money on a property and everything will be fine.”
Edwin Almeida is their buying agent – he’s a property consultant with 25 years of real estate experience in both buying and selling.
“I’ve never really seen anything this hot,” he said.
While real estate agents are often known for their tendency to exaggerate, CoreLogic’s latest March data on house prices supports his observations.
“Over the month, Australia’s occupancy rate was 2.8 percent,” said Eliza Owen, head of Australian research CoreLogic.
“That’s the highest growth rate we’ve seen since October 1988 and it’s pushing values 6.2 percent higher throughout the year.”
Kiwi leads the way
But if you think the Australian property market is hot, try crossing it.
Since the COVID-19 pandemic hit a year ago, prices in New Zealand have risen by more than 20 percent, and about 25 percent in its largest city, Auckland.
“The economy was improving in its last place, only with lower interest rates, so the housing market massively exceeded expectations,” explained Sharon Zollner, ANZ chief economist for New Zealand.
Like Australians, New Zealanders were already managing record mortgage debt before the last boom.
Unlike Australia, regulators are already starting to do something.
The Reserve Bank of New Zealand has had a cap on low deposits, or a high loan-to-appraisal (LVR) ratio, of loans since late 2013.
But New Zealand held it back, only temporarily dropping it during the pandemic.
“The Reserve Bank suspended the LVR limitation for 12 months but, in the end, they reimposed it earlier than they expected,” Zollner said.
“The banks themselves were running it up front and putting it back even earlier than that.”
Ardern’s controversial tax change
But that’s not enough for the Ardern government, which was first selected on a platform to increase housing affordability.
First, he asked the Reserve Bank to consider house prices in its interest rate policy, a move the RBNZ rejected, which resulted in watered down terms.
“If the Reserve Bank does have to take housing prices into account to the extent that they take both inflation and employment into account, we will at some point have to swap jobs for homes,” said Brad Olsen, senior economist at Infometrics.
So now the Labor government has taken action on its own, with sweeping changes to New Zealand’s property tax.
“In the past, capital gains in New Zealand were generally not taxed on housing,” said Mr Olsen.
“Now the rules are very strict that anyone who sells a house, who was previously in five years, now anyone in 10 years, has to pay taxes on those capital gains.”
More controversially, the New Zealand government has removed a tax deduction on mortgage interest costs for property investors.
“Now investors cannot claim their interest payments to lower their overall tax burden,” explained Mr Olsen.
Ardern’s change of government was far more dramatic than the proposal that the Australian Labor Party submitted to the last federal election.
New Zealand has effectively hedged off claims for reduced interest on property income only – what the Australian Labor Party proposed, effectively removing negative gearing.
Now investors cannot withhold mortgage interest payment tax at all, even against their rental income.
Mr Olsen said that means the property is selected from nearly all businesses and other investment activities.
The changes are already in effect for new investments, and there is a four year transition for existing investors.
‘Now is the time’ to limit interest deductions
Some analysts had predicted that would shift New Zealand property prices from a 20 percent increase to a 10 percent decline.
But Brad Olsen disagrees.
“This will put some of the higher leveraged people out of the market and will likely see house price growth slow down significantly,” he forecasts.
“But in our forecast we don’t expect house prices to fall any time soon, as there is still a significant housing shortage in New Zealand.”
He said there were other factors currently softening the blow.
“Now is the time where there will be less impact on a lot of investors with low interest rates and the payments they are making are not as big as they were before.”
Will Australia follow again?
But what does all this mean for Australia?
ANZ economists on this side of the trench see us on the same trajectory as New Zealand, only months behind.
“Australia is rapidly catching up and so are our expectations by the end of the year – house prices are up about 17 percent – we will be in the same position as in New Zealand now,” said Felicity Emmett, senior economist with ANZ in Australia.
The prospect of an imminent property tax change seems minimal, with the Morrison government having campaigned hard against them in the last election and Labor yet to recommit to them.
However, Emmett is part of a growing chorus of analysts who now see it as almost inevitable that bank regulator, APRA, will again limit home lending later this year to cool the housing frenzy.
“Previously, they had introduced limits on investor lending and interest-only loans, so that’s a possibility,” he told me.
At the AFR Banking Summit earlier this week, the chair of APRA recognized the chorus, but suggestion is vague that the so-called macroprudential lending limit is complete.
By contrast, Wayne Byres played down the recent increase in low-deposit and mortgage loans that were at least seven or eight times the borrower’s annual income.
“It appears to be highly correlated with what is a significant increase in the share of first-home buyers who have been on the market to date,” he told the assembled bankers.
Prospective first home buyer Brendon Miszka may disagree with him.
“The size of the loan is a bit intimidating compared to income and figuring out how long it will take to pay off all that,” he told me.
“When you look at a list that’s probably $ 1.2 million in price and the house ends up selling for $ 1.9 million – whenever something like that happens you wonder, ‘I’d better think about increasing the budget, should I try and borrow more’. “
But he and his wife didn’t want to be pushed into a lifelong debt trap to buy a house.