housing shortages for low income: market failure or a policy failure? ali salman prime institute...
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Housing Shortages for Low Income: Market Failure or a Policy Failure?
Ali Salman PRIME Institute
What do we know?Income(PKR)
Rent
Total 30999 3620
1st quintile
16583 1295
2nd 20436 1858
3rd 24188 2432
4th 29255 3244
5th 53001 7348
Income(PKR)
Rent
Total 38923 6354
1st quintile
17414 2469
2nd 21744 3116
3rd 26228 4007
4th 29225 4871
5th 57850 9675
Income(PKR)
Rent
Total 26452 2051
1st quintile
16428 1076
2nd 20015 1454
3rd 23273 1725
4th 29275 2139
5th 46424 4192
Pakistan RuralUrban
Data source: PBS, 2013-14 www.primeinstitute.org
Supply and Demand Gap
Demand and supply (million units per year)
There is an over-supply of housing units for the upper and upper middle income, and severe shortage of housing units for the low income.
Series10
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
demandsupply
Housing shortage
=0.4 mn per year
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Market Failure?
A situation where market-driven outcome diverges from a socially optimal outcome
It results in misallocation of resources Loss of economic and social welfare However, just because the market
doesn’t provide a good or service, it doesn’t mean there is market failure (case of effective demand i.e. a demand should be backed by capacity to pay.)
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Market or Policy?
The extreme degree of housing shortage is a market failure, however it is caused by a set of bad policies.
The “effective” demand is much lower than “need” due to inflated prices of property.
If housing finance demand is PKR 3 trillion (30 billion dollars), how much of it is “effective?”
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National Housing Policy 2001
The Policy earmarks of plots for low income housing on ‘cross-subsidy’ basis in new development plans both under the public and private sectors.
The Policy also commits to provide the land on concessionary rates.
On the housing finance, the policy encourages HBFC and private financial institutions to offer preferential rates for clients from low income segments. Federal government allocated Rs. 20 billion in 2014-15.
As part of its policy direction on zoning, the Policy commits to promote the concept of mixed development to ensure effective integration of low income groups.
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Policy is not right
The underlying assumptions of policy makers is that ‘price’ of both asset (land) and its financing (bank) is unaffordable, and they offer subsidies as solution.
There is no discussion on whether the given price is a fair market price or not? i.e. are prices free from coercion?
Coercion can occur from government monopolies and private sector collusions.
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Housing is a city problem…
“Cities are for densities. Due to zoning restriction and considering density as something highly undesirable, policy makers and bureaucrats who are in control of affairs encourage urban sprawl which makes it difficult to reap the benefits of cities. There is strong correlation between densities in cities and productivity.” (Zahid Asghar, n.a.)
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Policy Proposals Facilitate price discovery in property markets. Minimize speculation from property business,
and ensure that houses are only built to be colonized instead of price appreciation and capital gains.
Introduce a ban/penalty on development of empty plots by the public and private sectors.
Encourage “good density” in cities by abolishing height regulations, re-zoning and strictly implement new standards.
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Government Role
Government should only be an agency defining contracts and standards and responsible for enforcing them.
Instead of building its own houses, due to which it makes the government a competitor, it should only be a facilitator.
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Market Role
Procurement of land, development and provision of utilities on open market conditions.
Selling houses and making a profit!
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