Positive Effects of Lower Interest Rates from the State Bank of Pakistan on the Real Estate Industry
The State Bank of Pakistan’s (SBP) recent decision to reduce the key policy rate by 150 basis points from 22% to 20.5% is a significant development for the real estate sector. This marks the first rate cut in four years, signaling a shift in monetary policy aimed at fostering economic growth.
he State Bank of Pakistan’s Monetary Policy Committee’s (MPC) decision to cut the key policy rate injects a much-needed dose of optimism into Pakistan’s real estate market. This decrease in interest rates has the potential to reignite activity in the sector, which has been grappling with the effects of high borrowing costs in recent years.
Understanding the Impact of Interest Rates on Real Estate:
Over the past few years, Pakistan’s interest rates have fluctuated significantly. The last reduction before this year was in June 2020, during the pandemic, when the rate was brought down to 7%. Since then, the rate has gradually climbed to a record high of 22%, maintaining that level for nearly a year.
Interest rates play a crucial role in influencing investment decisions in the real estate market. When interest rates are high, as they were for the past year, several things happen:
Increased Cost of Borrowing: Securing loans for property purchases becomes significantly more expensive for potential buyers. This dampens overall demand in the market.
Shifting Investment Focus: As banks offer higher interest rates on savings accounts, some investors and the general public choose to park their money in banks rather than riskier ventures like real estate. This reduces the flow of funds into the property market.
The Boom and Bust Cycle:
A few years back, Pakistan witnessed a real estate boom fueled by a combination of factors. One major contributor was the lower interest rates offered by banks. This low-interest environment encouraged people to withdraw their savings and invest in real estate.
Furthermore, the government policies of the time, coupled with increased overseas investment from Pakistani expats, further fueled the boom. This led to some questionable practices, like builders offering unsustainable “rent-back” models with high returns. However, this unsustainable growth couldn’t be maintained.
Builders' Models and Market Dynamics
Interest-Based Models: Builders introduced interest-type models where investors could put in a substantial amount (e.g., 1 crore) and receive a monthly return (2–3 lakhs) even before the construction was completed. This model, though initially attractive, faced challenges as some projects defaulted or ran into issues, especially when bank interest rates surged to 22%.
Impact of High Interest Rates: The increase in bank interest rates led to a withdrawal of investments from the real estate sector, as people preferred to deposit their money in banks to earn high-interest returns. This shift negatively affected real estate investments and slowed down market activity.
Gondal Group of Marketing's Approach
At Gondal Group of Marketing, we maintain a straightforward and transparent model, focusing on installment-based payments for our clients. This approach ensured that clients could purchase properties on installments and take possession upon completion, avoiding the pitfalls of interest-based models( Ribah / Sood).
Pakistan's Real Estate Market is Making Recovery
Good news for Real estate buyers and investors: With lower interest rates, monthly mortgage payments become more affordable. This opens the door for a wider pool of potential buyers to enter the market, especially first-time homebuyers who may have been priced out at higher interest rates. This increased demand is expected to boost property prices in a healthy and sustainable manner, benefiting existing homeowners and investors.
Early signs of this trend are already being observed in Islamabad and Rawalpindi. In established Islamabad sectors like DHA Phase 2, DHA Phase 8, Bahria Town, CDA sectors , B-17, Park View City , Capital Smart City, Blue World City, ,Silver City, and other new housing societies prices for plots and houses have shown a noticeable uptick in recent months. Similarly, in newly launched housing societies, there’s renewed investor interest with the potential for price appreciation.
Real Estate Investment Landscape: When bank interest rates become less attractive, investors seeking higher returns may turn their attention back to real estate. This renewed investor confidence can lead to a significant increase in investment capital flowing into the property market. This influx of funds can have a positive impact on various aspects of the sector, such as financing new development projects, improving overall market liquidity, and potentially leading to the development of more innovative real estate investment products.
A More Balanced Market: A decrease in interest rates can help create a more balanced real estate market. With more buyers and investors actively participating, the market should see a healthy increase in demand. This, coupled with a more stable supply of properties, can contribute to a more predictable and sustainable market environment in the long run. This stability will benefit all stakeholders, including buyers, sellers, investors, developers, and the overall economy.
Looking Forward:
The recent decrease in interest rates is a promising development for Pakistan’s real estate industry. There is good indicators which point out that Real estate market is making good recovery