Interest Rate Increase and Pakistan Property Sector
State Bank has increased the main policy rate by 100 basis points. So interest rate has increased to 7.5% from 6.5%. The interest rate has been increased to control the rising inflation. Inflation is rising due to increase in crude oil price in the world market and also due to the depreciation of Pakistani Rupee. Let’s discuss Interest Rate Increase and Pakistan Property Sector.
How interest rate impacts real estate sector?
Increase in interest rate:
When interest rate increases, banks give more profit on the saving counts. So people sell properties and deposit their money in banks. The massive sale of properties results in capital flight from reality sector due to which property prices fall.
Decrease in interest rate:
When interest rate decreases, people get less profit on their saving account. So people withdraw money from banks and invest in reality sector. In short due to the rise in interest rate, investment in reality sector increases which leads to property price rise.
How interest rates have impacted Pakistan real estate sector in past?
Pakistan has observed two real estate booms in the 21st century. First boom lasted from 2003 to 2006 and the second from 2013 to 2016. The reason of the both real estate booms was the record low interest rates at 7.5% and 5.75% respectively. During both real estate booms, people got less profits on their saving accounts. So people withdrew the money from banks and invested in reality sector. The massive investments in reality sector resulted in property booms.
What is in store for Pakistan property market?
Pakistan real estate sector is stagnant at the moment due to high property taxes, low investments and crackdown on black money. The volume of real estate transactions is record low whereas property prices are 30% down from peak of 2016. We are already facing the house affordability crisis and luxury property market is hit hard which thrived on black money. Now as interest rates are increasing, so the price fall will gain more momentum in the coming months.