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.