Property Prices Hammered as Interest Rate Increases to 13.25%:
The State Bank of Pakistan has increased the policy rate by 100 basis points. In other words interest rate has been increased from 12.25% to 13.25%. 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 Property Prices Hammered as Interest Rate Increases to 13.25%.
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.
Current Market Situation:
TRANSACTIONS have decreased greatly after the announcement of budget. In peak time 2016 there were approximately 200 daily file transfers but now just under 10. The trend is same in Bahria Town and other societies across Pakistan.
INVESTORS have abandoned the real estate sector due to many reasons. Firstly property prices are decreasing. Secondly banks are providing high profits on fixed deposits. Thirdly more taxes on sale of property up to 10 years.
SELLERS are very desperate to sell properties even at big loss. But unfortunately hard to find the buyers that have white money or can show the source of income. This is why properties are taking longer to sell at big discounts.
BUYERS are in the driving seat. They have plenty of options in the market at big discount rates. But buyers are not in hurry as they know that property prices have not bottomed out yet. Buyers waiting for the moment when property prices will be record low.
REALTORS are in worst condition. Since 2016, 40% realtors have closed their agencies. Big reputed real estate names are leaving market on daily basis due to record low income. Many realtors haven’t paid the rents. This is why that we can see estate agents protesting across Pakistan.
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. Pakistan will see Dubai Style Property Price Crash where no prices have declined by 75% since 2008. By the end of the 2019 prices will be 25-40% lower as compared to start of 2019 as crash has gained momentum.