Is Pakistan’s Real Estate Sector Refuelled by itself?

Is Pakistan's Real Estate Sector Refuelled by itself?

 Real estate is the leading sector in Pakistan that serves as a major avenue for investment. In recent years, the rate of return on real estate has always beaten the rest of the sectors or assets. The rise in housing prices may be due to more consumption but that is not the only reason. The drivers of demand for the real estate sector are slightly different from global drivers. In response to contractionary fiscal and monetary policies, consumption in Pakistan does not get affected anymore. Despite noticeable changes in the consumption of other goods such as car sales and gas, the price of properties remains the same due to such policies.

In Pakistan, along with the demand for housing and property, the demand for real estate is driven by the surplus funds invested in this sector by well-off or more affluent people of the country. However, with the Financial Action Task Force (FATF) conditions, it is not easy to take money out of the country. The funds cannot find a way out of the country due to strict laws and regulations against money laundering, hence, the investments and funds have shifted towards the real estate sector of Pakistan. When a person sells a property, the money acquired is further invested in more property. This is how the real estate sector is refuelled as investors keep on selling and buying new properties according to their budget and the potential of the real estate. It has given the sector a boost, and the business has become profitable. Nevertheless, land is a limited resource and the limited supply causes the rise in the prices of the property. As the investment of the buyers and sellers is multiplied, the offer on plots also grows exponentially.

If the policies remain the same, there will be an undefined boom in the real estate sector that might end up with adverse economic impacts. The real estate sector must be regulated as 40% of Pakistan’s economy is undocumented and it becomes an avenue for people to channel huge sums of money and turn them from black money to white cash. Moreover, the self-refuelling of the industry is resulting in less productivity for the export sector as people have the incentive to invest their funds in the real estate sector. To make the economy survive, investments must be done in productive businesses to encourage export. Furthermore, the tax laws must be changed according to sectors. The real estate sector is flourishing yet the taxes are indefinitely low. It gives more incentive to the people to invest in this sector and resultantly, tax collection for the government is low. It is important to limit the re-fuelling of real estate, otherwise, the economy will suffer in the long run and Pakistan’s Balance of Payment (BoP) will be in deficit.

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IMARAT Institute of Policy Studies

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