Is there a real estate bubble in Pakistan?
Pakistan real estate sector boomed from 2003 to 2005. During that time property prices were sky high and out of reach of common people. But eventually we saw it burst and investors sustained heavy losses. Once again Pakistan real estate sector is in bubble phase (house price to income ratio is 14:1 as per NUMBEO) and can burst anytime.
Reasons of present bubble
Record low interest rate
Pakistan state bank interest rate is record low at 5.75%. Due to low profits on fixed deposits, people have withdrawn their money from banks. This money has been invested in the real estate sector due to which we can see high property prices. But we should know that interest rates will not always remain so low as average historic interest rate in Pakistan is 11%.
Foreign buyers with high purchasing power
Many Pakistanis live in Western and Middle Eastern countries. They send huge remittances and large part of this money is parked in the real estate sector. Due to higher purchasing power as compared to local Pakistanis, foreign Pakistanis buy expensive properties which increase the overall property prices.
Massive influx of black money in reality sector
Real estate sector and black money has long history of hot romance. People just buy real estate to whiten the black money. Due to massive influx of black money in real estate sector, prices have gone insanely high. It’s hard for honest person in Pakistan to buy a decent home. Without black money, prices will be me much lower.
How this bubble will burst?
We will either see the hard or soft crash. Property prices will crash hard if there is an effort by government or SC to curb the black money. Soft landing will be in the case if purchasing power increases due to fast rise in salaries, but property prices will be stagnant for 4-5 years. It’s clear that we have entered the bubble territory once again. Let’s see it’s a soft landing this time or hard crash like 2005.