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Another Blow to Property Prices as Interest Rate at 12.25%

Another Blow to Property Prices as Interest Rate at 12.25%:

The State Bank of Pakistan has increased the policy rate by 150 basis points. In other words interest rate has been increased from 10.75% to 12.25%. The interest rate is known as the best tool to control the rising inflation and depreciating currency. As per government, interest rate has been increased because of high crude oil price in the international market. This blog describe Another Blow to Property Prices as Interest Rate at 12.25%.

INTEREST RATE vs PROPERTY PRICE:
Impact of interest rate increase on real estate prices:

Property prices decrease after the increase in interest rate. This is because banks give more profits on saving accounts. So people sell properties to deposit their money in banks. More properties than the buyers decrease the property demand so prices fall.

Impact of interest rate decrease on real estate prices:

Property prices increase after the decrease in interest rate. This is because banks give less profits on saving accounts. So people withdraw money from banks to invest in real estate sector. The increased demand for real estate results in increasing the property prices.

History of Pakistan interest rate changes and impacts on realty sector:

In recent century two property booms and crashes have been observed in Pakistan. First boom/crash was from 2003 to 2006 whereas second boom/crash was from 2013 to 2016. Both booms were the direct results of record low interest rates (7.5% and 5.75%). But both booms were followed by a property price crash when interest rates were increased.

Pakistan realty market and the future price trends:

The property prices in Pakistan peaked in 2016. Since then prices are in constant decline due to increase in property valuation rate by FBR, higher taxes on property transactions (Stamp Duty, Withholding tax & Capital Gain Tax) and low investments. Property transactions are record low. Prices have already decline by 40% for high end properties in high speculation markets. Property prices of 2016 will be observed in 2025. So a long decline and stagnation.

People want to know amnesty scheme:

Tax Amnesty Schemes have never worked in Pakistan because people don’t want to be tax filers. The property prices are in constant decline since 2016 even an amnesty scheme was offered in 2018. PAKISTAN AMNESTY SCHEME 2019 will fail like previous amnesty schemes. Readers should know that most important factor that increases or decreases property price is the INTEREST RATE. Therefore people who want to see high property prices have to wait for the interest rate decrease.

Recommended:
Pakistan Real Estate Forecast 2019

21 Comments

  1. Fraz

    on   said 

    The restriction of non filers to purchase more than 4 million property is going to abolish in this budget. Hopefully it will bring things to positive side.

    Some activity in construction and tax collection will start after that.

    Reply
      • muhamamd azeem uddin

        on   said 

        sir how are you saying interest rate will cross 14%, what do you mean by cross ?? it will go 15 % to 16% ??? kindly share the information please.

        Reply
        • Muhammad Azeem Uddin
          Yes it can cross 15% or 16%. I just saying 14% because in 2009 Pakistan State Bank Interest Rate was 14% and no one wanted to buy property. We have reached the same point in 2019.
          So 10 years property cycle? Looks like

          Reply
          • Fraz

            on   said 

            In the Pakistani property market, there is no direct influence of interest rate to the property prices. It only applies to the countries where property depends on the mortgage.

            No one will sale his property in a panic to deposit amount in the bank for interest. Instead, investors are waiting for a good time to come.

            Also, no one will buy property in this slump. Instead, they will deposit their investments in the bank for better profit gains.

            As a matter of fact, everyone in Pakistan loves to invest in property when they have funds available.

            But local investors are not investing in property because of the non-filer ban on 4 million-plus properties. It will be abolished in the budget so things will move in a positive direction. (Most businessmen are non-filers)

            Foreign investors are not investing due to uncertainty in PKR devaluation. When PKR become stable, foreign investors will start investing. Currently, they are retaining their funds in the foreign banks and in foreign currencies and waiting for a good time.

  2. Fraz

    on   said 

    The restriction of non filers to purchase more than 4 million property is going to abolish in this budget. Hopefully it will bring things to positive side.

    Some activity in construction and tax collection will start after that.

    The effect of inflation and devaluation will be affectinf property prices after the lifting of property ban for non filers.

    Reply
  3. Naseer

    on   said 

    Hi Anwar
    Thanks for sharing such a nice blog, I have one confusion when i see prices on zameen.com for Topcity 1 block A, 10 Marla. There is no sense at all some are selling it too low some are selling to hug.
    By any chance do you have correct price list for proper in Topcity 1 Islamabad.
    Thanks

    Reply
  4. aziz ahmed nawaz

    on   said 

    The prices of realestate in Pakistan has been and still is way overpriced compared to the average earnings of the population. I live in London and find plot and property price in Pakistan are in comparison to UK unbelievably out of all proportions.
    When visiting Pakistan (Rawalpindi) it seems everyone is a property salesman, as if the only industry is realestate. Miles and miles of plots everywhere you look, it seems commercial plazas are occupied ground and first floor (some) but the rest of the buildings remain empty.
    There must be billions upon billions of Rupees tied up in property and losing value by the day. What a shame our country seems to be only interested in short term quick buck mentality. Only if all this money was invested in industry and in long-term future of our nature creating jobs.

    Reply
    • Aziz Ahmed Nawaz
      Excellent analysis.
      Same is true for every major city of Pakistan.
      DHA Commercial Broadway DHA Phase 8 Lahore just opposite to Allama Iqbal Airport has very few buildings / plazas but prices are sky high. Owners are in loss due to massive devaluation of rupee.
      Recent laws and high interest rate has diverted money from realty sector but it will take sometime before prices will cool down.
      In future we will see realist ratio of property prices and purchasing power.

      Reply
    • Muhammad azeem uddin

      on   said 

      Dear Aziz Ahmed
      if major focus to set up industry like you people are understanding that make Pakistan prosperous

      But unfortunately during last many years the decision maker is not understanding. WHY??

      See where in 1970, 1980, 1990 Pakistan economy and compare it from neighbouring countries. 2019.

      It means all are being going on way by planning. Now you see if we cut import we can not because we don’t produce as well we can not increase export . Our cost of production is high ??

      The good area for hidden black money park it in plot.. this facility I think not available in the world . Only in Pakistan.

      I mean in DHA 200 sq/ yard commercial plot cost you 17 crore about 1.2 million USD. But you will have need on government paper value USD 100,000. One hundred thousand. Others it depend up to you how can you arrange no one will ask you?

      Reply
  5. Abdullah

    on   said 

    Sir,
    Let me give you my prediction on property prices. I anticipate 80-90% average decline in property prices in dollar terms from its peak in 2016 before next bull market in property starts. Allah knows best.

    Reply
  6. Asad

    on   said 

    Hi Anwaar,

    Your blogs are very informative, with good analysis. I had a couple of questions,

    a) Why is there no reasonable decline in property prices on Zameen.com given the hike in interest rates, devaluation of Rupee, as well as the expected CGT and Benami Act impact?

    b) Personally, I was in the process of getting financing to buy 1 kanal plot and start construction with the purpose building our own home. Given the current upheaval in the interest rates, and the fact that property prices have gone up (Gulberg Residencia – Islamabad) in the last 4 months by 40% – maybe due to the panic. I’ve decided to put a pause on things. However need to know when it would be reasonable to buy i.e. by when do you think the land prices will settle down. Also – should I hold off on the plot purchase and house building plan for some time (how long ?)

    c) Price for a 1 kanal plot in Gulberg Residencia (Islamabad) Block E was being quoted at 80 lac about 12 months ago, at 100 lac about 6 months ago, and right now at 130 lac. Can you shed light on this phenomemon – this seems to go contrary to what should’ve been happening. Also if prices are to come down, can you estimate to what level i.e. back to the 12 month level of 80 lac ?? or lese/more?

    Thanks in advance for your input.

    Reply
    • Asad
      They are just showing asking prices not the selling prices.
      Selling prices are very low as compared to the asking prices.
      Prices will decline by 25-30%.
      Or 70% from peak of 2016.
      These are just the hypes but no real demand.
      Dealers are closing businesses on daily basis.
      Just consider.
      DHA Islamabad Phase 2 have many plots of price range 1.5-1.75 crore.
      Then why people buy plot in Gulberg Residencia when first choice is DHA / BAHRIA TOWN.
      Its just the speculation / asking price

      Reply
      • Mohammed Asif

        on   said 

        In Karachi every property prices going day by day high as you said this demand not selling price but seller are not ready to sell on reasonable offer

        Can’t understand should buy or not

        Reply
  7. Ayesha Rehman

    on   said 

    Indeed bad news for Pakistan real estate sector. But more bad news ahead as interest rate will increase further in coming months.

    Reply
    • Ayesha Rehman
      Its true.
      The reason is the agreement with IMF to bring dollar at 160 PKR before the bailout package.
      Rupee depreciation will increase the inflation and the State Bank of Pakistan will increase the interest rate to control it.
      SOME CALCULATIONS ABOUT RISE OF DOLLAR:
      Many people think that foreign Pakistanis will invest in property because rupee is in decline but dollar and other currencies are strong.
      For example a person buys house by spending 60,000 dollars in Pakistan when dollar rate is 100 PKR so he buys property at 60 LAC. He sells proper after 2 years and dollar rate is 150 PKR. Although property price fall but we consider property prices are same. So he will sell home at 60 LAC but in dollar he will get 40,000 dollars. So no one gains benefits in an economy where currency is declining but inflation is increasing.
      WHEN PROPERTY PRICES WILL BOTTOM OUT:
      This is the most common question.
      Property prices in Pakistan will bottom out when interest rate will start increasing. This will happen only after few years when real economy will grow.
      Pakistan Interest Rate will be between 14% to 20% in the coming months. So more price fall on the way.

      Reply
      • Ahmad

        on   said 

        “Pakistan Interest Rate will be between 14% to 20% in the coming months. So more price fall on the way”.

        Really! Then we should assume that all business will take a nose dive including real estate market. I mean who will invest money in business if someone gets 15-20% profit from bank.

        Reply
        • Ahmad
          Exactly. Few people understand that when interest rate increase cost of doing business increases but profits decrease. But bank profits increase so people deposit money in banks to earn high profits on fix deposits.
          Interest rate was 14.5% in 2009 and businesses were down in Pakistan. We will see the same trends in future.

          Reply
    • Fraz

      on   said 

      The interest rate will not affect the property market in Pakistan. It only effects when property depends on bank mortgages.

      Reply

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