Making Home Ownership Viable Part 1
Home ownership is an instinctive human need and will remain the cherished dream of most Bangladeshis. Unfortunately, cherished dreams are not enough to sell homes. Home ownership and the investment in real estate has to be a viable economic proposition. A pragmatic government policy is needed to ensure the health of the housing industry of Bangladesh thereby bringing into reality the dream of home ownership for the maximum possible number of people of the country.
In 2019 Rehab members launched new projects consisting of about 12,000 apartments in Dhaka. For a city of 15million inhabitants with a GDP of $170 billion, a meagre 12,000 new units being launched in a year is pitiful. Compare this to Mumbai with a population of 20million and a GDP of $450 billion where 79,810 apartments were launched in 2019. Or to Bengaluru with a population of 11.8m and GDP of $210 billion where 33,772 new apartments were launched in 2019. Source- The Economic Times https://economictimes.indiatimes.com/wealth/personal-finance-news/will-indian-real-estate-bounce-back-in-2020/articleshow/73200727.cms?from=mdr.
I have intentionally not brought into reference the statistics of the more developed countries so that we can compare apples to apples. India and Bangladesh have more or less similar “Nominal per capita GDP” and are close to each other in the Human Development Index(HDI).
I am incredibly proud of the progress Bangladesh has made in almost all spheres during the last two terms of the present government. Our economic fundamentals are on a sound footing. The GDP growth, foreign exchange reserves, debt as a percentage of GDP have all been very strong. This is all the more reason to be wondering why our real estate industry is performing so poorly. The real estate industry is generally considered to be the backbone of a nation’s economy. The Geneva UN Charter is a non legally binding document that aims to ensure that member states provide decent, adequate, affordable and healthy housing for all its citizens. In light of the above, has enough been done for the housing industry of Bangladesh? Our housing industry contributes 8per cent to the national GDP. A significant contribution indeed but it is trailing way behind when we compare it to our neighbour India where it contributes 15 percent to the national GDP. The point I am trying to make here is that this very important sector is not being managed right.
The first thing to understand is that the housing industry is not benefitted by desperate price cuts by the developers. In a highly competitive market like ours where the developers work on paper thin margins, discounts and price cuts can only be accommodated by cutting corners and doing poor quality work. Price reduction also harms those buyers who have already bought their homes at the previous higher prices. This creates negativity among investors and the outcome is a downward spiral due to a lack of confidence in the market. The end result is lower economic activity which also affects the GDP growth of the country due to lesser number of new projects being launched and home ownership remaining a distant dream for the majority of the people of the country. It is paradoxical that when prices of apartments start rising the sales volume also increases. This proves that the market is very much sentiment driven.
Buyers of apartments fall into two broad categories. The aspiring home owner and the prospective investor. Let me analyze the situation from both perspectives.
There are so many self proclaimed experts who are constantly criticizing the developers for only building homesteads for the wealthy. What they fail to comprehend is that the developer will build only where there is a demand. It is up to the government to make policies which will create the demand from any particular socio economic group. Looking at it from a middle- income person’s perspective, owning an apartment in metropolitan Dhaka is beyond affordability. The middle- income person spends about 30-40 percent of his monthly income on rent. He can only afford to pay the same amount towards his monthly EMI if he is to buy an apartment. Assuming that he wishes to own an apartment of a similar standard to the one he presently rents, he can only borrow up to a maximum of 50 percent of the value of the apartment. The other 50 percent of the price of the apartment he must arrange from his own sources as his share of the equity. This is unaffordable for the vast majority of middle- income people and therefore puts to rest their dream of home ownership.In the countries where a large segment of the ordinary people own homes, it is usual to pay only 10 percent of the value of the property as the buyer’s equity and the rest coming in housing loan with an EMI which is about the same as the rent the buyer would otherwise be paying. Of course this happens because the economy in these countries is much stronger and hence the affordability of the buyer is more. We may not be able to bring home ownership within the means of all people but with the right policies the market can be expanded to make home ownership possible for many more people.
From the prospective investor’s viewpoint, buying an apartment in metropolitan Dhaka is not a very attractive proposition either. The ratio of rent to price of the apartment is very low (between 3-4 percent) whereas the home loan interest is 9 percent. This means that if he is to service the debt on the purchase of the apartment from the rental income, he has to also put up a very big percentage of the price of the apartment as his share of the equity. Over the years unless there is a good appreciation in the value of his apartment, his investment is not very lucrative. Price reductions and discounts which the developer is forced to make on account of a dull market affect the investors very badly. Nobody wants to invest in an asset which depreciates.
In response to the assault of covid-19, our Prime Minister showed her sagacity in promptly announcing a stimulus package to support our economy. Soon there were demands from different trade bodies and association seeking fiscal support for their respective sector. I will not comment on matters relating to the other sectors but I will qualify my views relating to the real estate industry. I am totally against providing any kind of financial support be it in the form of interest waiver or new loans on low interest rates to inept developers who have run into financial distress on account of their own greed and incompetence. This will only give a wrong signal that it is okay to be irresponsible and incompetent because you would eventually get bailed out. These are the developers who created havoc in the industry by offering very high rates to the landowners and signed up innumerable deals without any regard to the financial viability the projects. Bailing them out would be harmful to the real estate industry. These shoddy developers also bring untold misery to the unsuspecting buyers who get lured by the fancy advertising and colourful brochures only to find that with any turbulence in the market, the developer has indefinitely delayed the completion of the project or in some cases abandoned it completely. Such malpractice gives the entire industry a bad name and destroys the buyers’ confidence.
The objective of the government’s policy should be to make the market strong and vibrant. Not to bail out non performing developers. Policies should be directed at making home ownership affordable and investment in housing to be a financially lucrative proposition. There is an old proverb, “you can’t have your cake and eat it too”. This applies to our policy makers when it comes to housing. Do you want to make it possible for the maximum number of people to own homes and the housing industry to prosper or do you want to maximize the government revenue by imposing direct and indirect taxes on this industry which makes home ownership unaffordable? You cannot have it both ways.
In the next part of this article I will try to elaborate on some of the policies that can bring momentum to our industry.
Kazi Zahurul QyyumJuly 6, 2020
What you mentioned above is 100% true and the current practice is not at all convenient for many buyers who in spite of his/her best intention cannot fulfill this dream because of financial difficulty. The repayment of home loan is so rigid that if you miss any installment you end up in more trouble.
Secondly the banks take their interest first and your principal amount reduction is so small on a year to year basis which puts lot of pressure on the buyers. Even your rental amount payment will not make your position comfortable.
To me in order to cater to the middle class the developers needs to come up with a plan which should be a win win situation for buyers in order to increase sales of apartments.
It is difficult to mention what could be the best option to move forward.
One suggestion is to get funds from Government or Investment companies to finish the project with 20 or 30 percent down payment and when completed the buyer will shift to the apartment and start paying the monthly installment preferably equivalent to the monthly rent that the buyer was paying. The repayment period could be longer but the buyer will feel comfortable to think at least at the end of full payment the property will be theirs. This process will not only lead to increase sales of apartments with new buyers but will also assist the developer to get their apartments sold and get their return on investment.
But as you are an expert you contribution will be more valuable to see how your company can bring more benefit for the people whose one main aim in life is to own an apartment small,medium and big as per their capability. Real Estate Companies customers are plenty who will run after you only to find a comfortable and affordable offer to fulfill their dream.
By the way I am an owner of 2600 sft. BTI apartment in Basundhara R/A purchased 18 months back but my main concern now is to ensure that I pay my Bank Home Loan on time which is high but by the Grace of Allah settling the installments on time but the period of repayment is high. To complete the total payment is now my top priority.
Rubel AhmedJuly 6, 2020
Very well said
CAPT MOHAMMAD BELAYET HUSSAINJuly 6, 2020
Very well written and to the point.
Rahmat ShaheenJuly 6, 2020
Thanks a lot Sir, it’s a high time to make a state of policy for real estate sector.
Mizan SiddiqiJuly 6, 2020
Nice write up with data. Good housing is part of public health. The current pandemic remind us that unplanned, unhygienic and cramped places spread disease as we saw in many parts of developed and developing nations. We have a new dimension to add with earthquake, fire, flood to ensure if the housing solution can handle pandemic preparedness with hand washing, social distance and contamination. We saw how button of a lift can spread COVID-19. I enjoy your write up. Keep writing. Hope you got my book
ABCs of COVID-19.
I am lucky to stay one of the Bti building with only 8 floors and 7 owners in Banani with good space for each floor and lake on one side and road on the other side. Your contribution in housing sector both in quality and quantity need to be well documented with data, map and aesthetic. Dr.Siddiqi
Md. Gias UddinJuly 7, 2020
Asif IbrahimJuly 7, 2020
In this city that we call our capital and our home, only 19% of the total population owns a place that they can call their own. 81% population stays in rented premises. (BIDS). There has to be long term financing option available for buying homes for the middle class. Until we can come up with such an option the numbers will be abysmal. In the budget for FY 2020-2021 the government has given the opportunity for investment in properties by paying 10% tax. It will be interesting to see whether this measure stimulates the market.
Chittagong Stock Exchange (CSE)
Dhaka Chamber of Commerce and Industry (DCCI)
DawnJuly 7, 2020
No light has been shed on the effect of black money in the real estate market which is driving away white money and make the products dearer for the latter. Wish to get feedback on this. Thanks.
Habibul AlamJuly 8, 2020
Thanks for the well written and thought provoking write up. Indeed the topic deals with one of the most important element under UN Geneva Convention Charter though that is non binding on the member States. Unfortunately the governments care very little on the charter. Covid 19 has exposed the spending on health sector made. Housing is a basic need for a developing nation where more people for employment move to the urban areas. Have the policy makers given any thought on where to accommodate the stream of people in the city. Unfortunately its a reality our successive governments instead of decentralizing administration strengthened the centralizations creating slums after slums to serve the purpose of the vested interests. Mr. Haider is a pioneer in the real estate sector and foresee the scnerio and started from the scratches. Alhamdulillah he and his organization has earned respect and reputation in the trade. We all know Covid 19 Panndemic has caused a havoc. Bangladesh too was not spared. The other day there was a news item with pic. Some one has lost his job and cant continue to pay the rent he was paying for the place he had rented. He was shifting his belongings to his native home. His is the not the only case. Mr. Haider has rightly pointed out circumstance do not permit a middle class person to own an apartment in the city. Because of the transpirtation bottleneck the developers do not find it workable to build apartments outside the city. Its not possible to live outside the city and work in the city. Such scnerio is very common across the border in West Bengal.
Iqbal HossainJuly 9, 2020
Arshi, rather a comprehensive write-up. Eagerly await Part II of it.
Although, I am not aware of the intricacies of real estate pricings, but, I have seen how some developers delay in the closing and also do not pay the monthly agreed money to the buyers. Possibly due to over payments initially, or extremely poor planning, or some other reason unknown to me. As for buying an apartment, my opinion is that the central bank should come up with options, where the buyer can pay a reasonable 20 – 25% downpayment, and get a mortgage with an amortization of 15, or better 30 years @ maximum 4% interest, exclusively for people buying apartments. this will encourage a lot of buyers, rather than all this black money investment scenario. Thank you for the insight and await Part II to properly understand the dynamics at play in Bangladesh real estate market.
Brig Gen Mohammad Ayub Ansary, psc (Retd)July 9, 2020
Making Homeownership Viable is the centerpiece of the real estate development sector. It’s the crux for the advancement of the industry in our country especially in pandemic and post pandemic scenario. In this article the author has drawn a comparison of GDP, population and numbers of apartments of India- Bangladesh (Dhaka-Mumbai-Bangalore case) real estate sectors having similar Nominal per Capita GDP. Referring Geneva UN Charter, which advocates decent, adequate affordable and healthy housing and the industry’s contribution of 8% to national GDP, the sector is not taken care of. Here the duty of care of the govt. is essential.
Price cut and doing poor quality work, sentiment driven market where price increase leads to sales volume increase, reduction of price that blow negatively the buyers who have purchased their homes with previous higher price, lower income activity impacts on GDP growth, aspiring homeowners and prospective investors are discussed coherently that provides a valuable prescription to bring definite improvement in the industry.
Middle income group’s affordability to own a home, state of their income, spending on rent, borrowing for the apartment and supporting from own source have been depicted suggesting formulation of a policy that can bring more people to own a home, not 100%.
Mentioning the PM’s stimulus package, the write-up demanded developing the industry excluding the greedy and incompetent developers, unjustified high price for buying land and no financial support to the non- financially viable housing projects as the mal-practice destroys buyers’ confidence. The text gives adequate inputs to develop a policy framework by the governmental authorities in order to have a pragmatic policy that turns real estate market strong and vibrant, no rescue to the non-performing developers, investintment in the housing industry financially lucrative and making homeownership affordable to maximum people.
SEOOctober 15, 2020
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