By: Anwar and Mustafa Haider.
Real estate sector is the sector related to the buying and selling of property ranging from commercial and residential plots and buildings. This sector can’t be called an industry and is having very less contribution to the overall economic development of a country. This sector is generally considered as a safe haven for investment in terms of the very little or no risk associated with it. Also this sector generally ensures guaranteed profit due to the property of land that is appreciation in value with the passage of time. Here we will have an in-depth analysis of real estate centric investment mindset in Pakistan.
First of all, when we look at the general investment mindset of the people in most of the developed nations we will find that they tend to invest more in stocks, bonds and other financial instruments instead of real estate. This is because these instruments promise more return compared to the investments in real estate sector. This is because in developed countries there is strict regulation regarding the increase in rental, selling and buying prices of residential and commercial property. Also these countries are having business friendly environments. These factors encourage their people to invest more and more in profitable businesses instead of making their capital dead by investing in real estate. On large scale this intention of their people acts as engine of growth for their economy. This trend is having positive contribution toward the economy in various ways first this investment results in the creation of products and services employing a considerable manpower in turn creating millions of jobs bringing down the unemployment rate significantly. The products and services generated as a result of this economic activity fueled by this investing mindset first of all fulfils the domestic needs and save billions of dollars by reducing the import bill. The surplus is exported bringing in foreign exchange worth billions of dollars. This is also a main feature of developed nations that they are having billions of dollars of exports usually having a huge trade surplus. In addition to all these economic benefits the individual is also benefitted hugely compared to the investments in the real estate sector.
Now we will look at the situation in Pakistan. In Pakistan the prices of the real estate sector are fully unregulated and the value of property increases abruptly resulting in un-proportionate profit for the ones who invest in this sector. This huge profit is earned by the investors without any effort or contribution to economic development instead they earn profit at the expense of the ones who are in need of real-estate especially for housing needs. This situation has setup a different trend here compared to the developed nations people prefer to invest more in the real estate sector and are reluctant to invest in stocks, bonds and other financial instruments. Due to the business unfriendly environment they are also reluctant to invest in or setting up their own businesses. As a result of this trend the overall economy is adversely effecting, major portion of capital is locked up in this sector as dead capital instead of circulating in the economy. For the economy opportunity cost of this trend is lack of job creation, goods and services production, increased import bill and stagnating exports thus leading it toward trade deficit. In addition, this trend is also proving disastrous as it is further widening the gap between the social classes as the unregulated increasing prices makes the sellers of the real estate richer on the other hand the people in desperate need of property for housing and commercial use have to pay extraordinary high price. Inflation is also on the rise as people tends to stockpile property in order to earn extraordinary profits by creating shortage in the market.
The highly unregulated Pakistani real estate has become a barrier to Pakistan’s sustainable economic development as it is discouraging investments towards businesses and widening the gap between social classes. It is resulting in less economic activity thus widening the gap between exports and imports forcing the country to go for debt In order to make the economic development sustainable there is a desperate need to regulate this sector of the economy to create a business friendly environment focused on wealth maximization resulting in job creation and increased foreign exchange. Otherwise we will remain in the vicious cycle of taking and paying back foreign debt and widening import export gap.
