A PRIVATE housing colony in suburban Lahore, where there are 1000 plus one-kanal or bigger houses, does not have many homes with final approval from the Lahore Development Authority (LDA).

The colony was developed at a time when army jawans from the ammunition depot nearby used to hassle homebuilders by demolishing walls or taking away building material to deter construction in the area. So, LDA would not approve the houses.

The jawans stopped hassling homebuilders when the number of houses became large. But LDA never got down to legitimising the construction and now asks for too much money, as graft, to do it. So the houses are bought and sold but it is not fully legal.

The above is a small example. The housing market is one of the more distorted markets across Pakistan. It has given high rents to elites who have been and are able to control the distortions. On the other side, it has made investments in housing very problematic for most citizens, has held back development and has pushed people into the informal sector. Pakistan’s urban population has been expanding rapidly and the demand for developing urban infrastructure has been significant. But distortions in housing and real estate have held this development back: even in 2000 Punjab alone had a shortage of 2.5 million odd houses.

The total annual investment in housing, as a percentage of GDP, is one of the lowest in Pakistan. The total number of houses per 1,000 population is also one of the lowest and the ratio of housing cost to incomes is much higher in Pakistan than in most other countries. No wonder people turn to informal markets. Housing markets are so distorted that everyone, from the army to the land mafias to big real-estate barons, wants to be in the housing market and have made huge returns from it.

I asked an executive of a large retail store about the major obstacles they encountered in opening and expanding their business, he said the main one was finding and buying the right real estate in urban areas. He said finding ‘clean’ pieces of land that had clear property rights, no litigation issues and that did not involve land mafias was very costly and time-consuming. In some instances, it took more than six months, after a piece of property had been identified, to ensure things were in order before they could even start negotiations for purchase. This is a massive transaction cost for an exchange that could be much more efficient.

Public land ownership is too high, compared to other countries, in Pakistan. In Lahore, it is around 30 per cent of urban area. In other Punjab cities, it varies between 20-40 per cent of the urban area, compared to five per cent in some other countries. This ties up a lot of prime real estate that should be used for commercial/housing purposes. We need to figure out a way to deal with this but without giving this land to mafias or DHAs.

An ineffective land-titling/registration system and weak property rights make dealing in land harder. Buying/selling land in Pakistan is risky business even in urban areas. The incidence of fraud in land transactions is high. Property rights are more secure in DHAs and in some private colonies and we see land value differences in these colonies and the rest of the city that reflect, partly at least, the differences in security of ownership.

But if systems can be built for DHAs, which are not small entities in many cities now, why can they not be built for the rest of the city? Very powerful groups and individuals benefit from keeping rights weak. It allows mafias to work and monopoly rents to be had. But this is exactly the type of distortion that does not allow an efficient housing market to develop and provide the citizens with the housing opportunities that they should have.

Poor zoning laws, a weak urban infrastructure, distortions due to tax and rent control issues and unrealistic construction standards complicate matters more. Rather than make these laws and procedures for facilitating the development of an efficient urban real-estate and housing market and for facilitating commercial and housing activity, they are made to benefit particular parties or groups, for extracting maximum revenue for local authorities and/or for creating rent-seeking opportunities. Removing distortions in these procedures and making them less discretionary could reduce transaction costs substantially and facilitate and encourage higher investments in the sector.

When I was involved in recruiting faculty for our university, usually from North America and usually Pakistanis who had gone there for higher studies, we would come up against two issues that needed resolution before faculty would even consider our offer. They were housing and transport. Transport issue was addressed by offering loans for buying automobiles. But for housing, we just had to offer on-campus housing, for the first few years at least, to allow people to settle back in Pakistan.

The finance market for automobiles developed eventually and leasing/buying, through the commercial sector, became easy. But the housing issue persists even today. Lack of development of financial options in house-building/real estate is a definite constraint but it is tied to the other issues mentioned. These distortions make it too risky for commercial finance to enter the market in a big way and so where some banks finance housing in DHAs and other select areas they do not do so in urban markets as a whole.