How a Flawed Real Estate System Traps Billions and Erodes Trust
By Ussama Bin Sajjad Kiyani,
Pakistan’s real estate sector is a massive store of private wealth. Estimated to be between 15 to 20 trillion rupees and linked to around 200 allied industries. Yet its contribution to the GDP is less than 2%. This phenomenon represents a unique economic mystery. This sector seems more like a black hole than a reservoir of capital, absorbing national savings and remittances. Plagued by informality, lack of regulation and fraud, this sector traps productive capital, obstructs economic growth, and intensifies the social housing crisis.
As majority of the transactions happen via cash, the sector’s real contribution seemingly remains hidden. This not only aids in tax evasion but also shrouds the sector’s economic activity (construction, employment, material sales). Even so many housing projects are never more than just ghost operations and the “multiplier effect” of construction which should stimulate cement, steel, and labor markets, never materializes. And when development does occur its built on agricultural land or flood-prone areas, turning these economic assets into long-term liabilities.
Government documents reveal the sheer scale of illegality, around 69 percent of Pakistan’s housing societies are not properly registered. Out of approximately 8.767 societies, about 6,000 operate on deceptive or defective papers, and have associated fraud cases of over 300 billion rupees. The mechanism of this fraud is distressingly common. In just the twin cities, authorities have ascertained over 91,000 plots or files to be fraudulent or registered against non-existent land. One prominent example is of “New City Paradise” scheme, where an estimated 50 to 60 billion rupees of public money was collected for land the developers never legally owned.
There are hundreds of examples of both housing societies and high-rise buildings operating in such way and showing no signs of slowing down. Even though legislation clearly bans the marketing and selling of files and plots prior to approval of No Objection Certificate (NOC). Still, projects are launched, advertisements are made, offices are established, staff is hired, and files are floated in the market. Surprisingly, the development authorities are aware of any fraudulent operating schemes. In Rawalpindi district alone, official data shows over 149 illegal societies actively selling plots without proper approvals.
Though public notices and lists are provided by relevant departments what is lacking are the appropriate and timely measures. Often long after the deceitful developer sell off the plots, buyer re-sell them, and builders end up constructing houses and plazas, does the belated government action come. However, by this time the original perpetrators have frequently fled abroad and who is left to shoulder the ultimate financial and emotional blow?
It is the end-user who had invested their life savings. This results in trapping vast national resources including remittances. Studies indicate that in recent years, remittances exceeding 28 billion dollars were funneled into this obscure real estate market. For overseas Pakistanis, buying a plot back home is not only for future planning but also considered an act of patriotism. But often these hard-earned foreign exchanges are lost in the void of illegal societies. A great deal of public revenue is lost in the form to uncollected taxes. For instance, in the 2020-21 fiscal year, the potential real estate tax collection was estimated at 620 billion rupees, but only about 107 billion rupees was actually collected.
This directly links with Pakistan’s dire housing shortage of about 10 million housing units. Developing authorities are unable to keep up with the rising demand. For instance, Karachi needs 80,000-100,000 new units annually but hardly produces half, while Lahore faces a yearly gap of 30,000-35,000 units. This results in soaring market prices placing homeownership out of reach of the average citizen. Moreover, the banking sector is not well designed to accommodate wishful buyers. Even with the existing demand, Pakistan’s mortgage penetration hangs below 1 percent and a dismal consumer mortgage to GDP of 0.3 percent compared to India’s 11 percent and Malaysia’s staggering 44 percent.
This design problem further extends towards city planning and zoning as well. Even Islamabad, considered the most planned city of Pakistan faces this problem. If we look at the original city plans and what it has become, we would find a stark difference. The city has chaotically expanded towards all sides, into the slums, and management is stretched thin. Rapid urban sprawl and population growth have accelerated expansion and caused a logistical nightmare. Another common practice involves people holding political power purchasing boundary adjacent lands at low prices. Influence is then used to redesign city boundaries for inclusion within the capital. Sometimes however, even change of map isn’t needed and they market themselves as part of the capital with forged documentation.
Lack of proper zoning laws facilitates this behavior. Land is either not identified for commercial, agricultural, residential, and industrial uses or identification exists but monitoring and reinforcement are non-existent. As a result, we see industrial units being built over green agricultural zones and commercial activity seeping into the inadequate residential infrastructure.
Furthermore, the sector is a major contributor to employment. Its labor force is mostly comprised of fresh graduates waiting to get jobs in their respective fields or people captivated with promises of a quick pay day. Though large-scale projects do create job opportunities but the instability of a speculative market means employment is often temporary, uncertain, and underpaid.
Ill-advised urban planning along with demography also disrupts the climate. Uncontrolled urbanization leads to deforestation and diminishing of porous land. Creating long-term climate challenges such as extreme weathers, urban flooding, and ground water depletion. Shifting the environmental debt to future residents.
Nonetheless government’s responses do acknowledge the severity of the crisis, as seen by commitments to activate RERA, enforcing stricter penalties, and designing a digital registry. However, absolute progress requires a more profound transformation. This entails establishing a unified national digital land registry to eliminate title fraud, instituting mandatory escrow accounts to safeguard transactions, and radically streamlining the approval process by dismantling the cumbersome requirement for over 22 NOCs. The central choice is to cultivate a transparent, formalized sector capable of mobilizing trillions in dormant capital, ensuring sustainable fiscal revenue, and generating widespread employment. The cost of inaction is measured not just in lost billions, but in the nation’s stability and prosperity.
The author is a Staff Economist at the Pakistan Institute of Development Economics (PIDE). He can be reached at: [email protected]
