LECTURE 7 HOUSING FINANCE HOUSING FINANCE Housing finance

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LECTURE # 7 HOUSING FINANCE

LECTURE # 7 HOUSING FINANCE

HOUSING FINANCE Housing finance is a broad topic, the concept of which can vary

HOUSING FINANCE Housing finance is a broad topic, the concept of which can vary across continents, regions and countries, particularly in terms of the areas it covers. For example, what is understood by the term “housing finance” in a developed country may be very different to what is understood by the term in a developing country. The International Union for Housing Finance, as a multinational networking organization, has no official position on what the best definition of housing finance is. “Housing finance brings together complex and multi-sector issues that are driven by constantly changing local features, such as a country’s legal environment or culture, economic makeup, regulatory environment, or political system” In addition, the concept of housing finance and housing finance systems has been evolving over time.

CONTI. . Looking at definitions from the mid-1980 s, we see that housing finance

CONTI. . Looking at definitions from the mid-1980 s, we see that housing finance was defined primarily in terms of residential mortgage finance: “The purpose of a housing finance system is to provide the funds which homebuyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain. ” However, in more recent years, a number of other much wider definitions have appeared: “Put simply, housing finance is what allows for the production and consumption of housing. It refers to the money we use to build and maintain the nation’s housing stock. But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments. ” OR

CONTI. . “There is recognition of other relevant forms of housing finance [apart from

CONTI. . “There is recognition of other relevant forms of housing finance [apart from residential mortgage finance] such as developer finance, rental finance, or microfinance applied to housing. Developer finance is often in the form of unregulated advance payments by buyers, and developers sometimes provide longterm finance to buyers through installments sales when mortgages markets are not accessible. Microfinance for housing is typically used for home improvement or progressive housing purposes. Loans are typically granted without pledging properties. Although the overall impact of microfinance in housing remains limited, this activity can represent an important source of funding for those in the informal sector. ”

HOUSING FINANCE IN PAKISTAN According to the Housing Finance Prudential Regulations of the State

HOUSING FINANCE IN PAKISTAN According to the Housing Finance Prudential Regulations of the State Bank of Pakistan; Housing Finance means financing provided to individuals for the construction, purchase of residential house/apartment and for purchase of plot and construction thereupon. The finance availed for the purpose of making improvements in house/apartment shall also fall under this category.

TYPES OF HOUSING FINANCE

TYPES OF HOUSING FINANCE

DIRECT HOUSING FINANCE It refers to the finance provided to individuals or groups of

DIRECT HOUSING FINANCE It refers to the finance provided to individuals or groups of individuals including co -operative societies. This category include the following types of bank finance: Bank finance extended to a person who already owns a house in town/ village where he resides, or for buying / constructing a second house in the same or Other town / village for the purpose of self - occupation. Bank finance extended for the purchase of a house by a borrower who proposes to let it out on rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer. Bank finance extended to a person who proposes to buy an old house where he is presently residing as a tenant. Bank finance granted only for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, with the help of bank finance or otherwise, within such period as may be laid down by the banks themselves.

SUPPLEMENTARY HOUSING FINANCE Banks may consider requests for additional finance within the overall ceiling

SUPPLEMENTARY HOUSING FINANCE Banks may consider requests for additional finance within the overall ceiling for carrying out alterations / additions / repairs to the house / flat already financed by them. In the case of individuals who might have raised funds for construction / acquisition of accommodation from other sources and need supplementary finance, banks may extend such finance after mortgaging charge over the property mortgaged in favor of other lenders and / or against such other security, as they may deem appropriate.

INDIRECT HOUSING FINANCE The Banks ensures that their indirect housing finance is channeled by

INDIRECT HOUSING FINANCE The Banks ensures that their indirect housing finance is channeled by way of term loans to housing finance institutions, housing boards, other public housing agencies, etc primarily for augmenting the supply of serviced land for the constructed units. It should also be ensured that the supply of plots / houses is time bound and public agencies do not utilize the bank loan merely for acquisition of land.

CHARACTERISTICS OF HOUSING FINANCE Long term finance with repayments spread over 15 -20 years.

CHARACTERISTICS OF HOUSING FINANCE Long term finance with repayments spread over 15 -20 years. Most of the people prefer loan at fixed interest rate. The concept of variable interest rate is slowly picking up with the expectation of further southward movement of interest rate. Market is becoming very competitive after the entry of banks in financial institutions in retail lending. The spreads are declining the competition and unless long term funds at reasonable interest rates are made available, it would be very difficult to maintain bottom line.

INTEREST RATE AND SECURITY FOR HOUSING LOAN For housing loan, there are two types

INTEREST RATE AND SECURITY FOR HOUSING LOAN For housing loan, there are two types of interest rate: Fixed - for entire tenure of the loan Floating - which is changing throughout the duration of loan. The security in respect of housing finance is the property purchase with a mortgage is taken on the same. For additional security guarantee may be taken.

HOUSING FINANCE INSTITUTIONS IN PAKISTAN In Pakistan, around 27 commercial banks, House Building Finance

HOUSING FINANCE INSTITUTIONS IN PAKISTAN In Pakistan, around 27 commercial banks, House Building Finance Company Limited (HBFCL); a specialized housing bank and one DFI (Development Financial Institutions) are catering to housing finance. HBFCL is the only specialized bank in the country, which has been providing housing finance to public since 1952. In 1994, the government decided that HBFCL should operate as a market-oriented financial institution. Commercial banks entered the mortgage business during 2003 contributing very small share in the housing finance. Only few commercial banks extended housing loans during 2003. Although HBFCL’s share in the total housing finance has reduced in absolute terms, it is still the only institution that continues to cater to the lower-middle and low-income groups and enjoys the largest customer base. The total number of borrowers at the end of December 31, 2011 was 91, 398; HBFCL accounting for more than 75. 5 percent of these borrowers.

CONTI. . The Housing Finance sector did show progressive performance in the last five

CONTI. . The Housing Finance sector did show progressive performance in the last five years but that progress has not been in line with the potential. The yearly shortfall of 300, 000 housing units which has accumulated over the years to more than 1. 5 million gives the impression that this huge demand remains unattended. And the extremely low housing loans-to GDP ratio is a further proof to the dismal performance of the housing finance sector. Further, the disbursements being made over the years are so stumpy that it can easily be concluded that the Banks & DFIs are only serving the higher income segment of the society. This shows that the Banks & DFIs are only opting for low risk exposure and easy profits which is also a reason for such an immense shortfall of housing units. The Housing Finance sector has immense potential but so far its performance has remained gloomy due to lack of interest shown by banks & DFIs towards the low income segments.