Pakistan’s housing crisis needs innovation

Pakistan’s explosive population growth over the past five decades presents a pressing non-traditional national security concern. With ripple effects on water, food, and energy security, this demographic surge threatens social cohesion and economic stability. At the heart of these challenges lies the need for ‘affordable and climate-smart’ housing, a critical yet neglected issue that impacts 78 per cent of the population falling within lower-middle and middle-income brackets as per World Bank classifications.

To find practical and impactful solutions, let’s begin with the ‘First Principles’ by looking at the causal constraints holistically supported by data.

Pakistan’s population has swelled from 65 million in 1972 to over 240 million in 2023, a staggering increase of 175 million over 50 years. Over the next 25 years, the United Nations projects Pakistan’s population to increase by 160 million and surpass 400 million.

Despite years of political rhetoric and six government housing schemes since 1972, the annual housing demand of 350,000 units far exceeds the meagre supply of 150,000 units. The result is an urban housing backlog exceeding 9 million units as metropolitan areas have swelled under the weight of rural-to-urban migration.

To contextualise, 57 per cent of Pakistan’s urban population currently resides in informal shanty settlements according to a recent study by the Asian Development Bank, reflecting decades of neglect in affordable housing policy. The situation will become increasingly dire with over 70 per cent of the populace residing in urban areas by 2050, putting immense pressure on already strained housing infrastructure.

Empirical evidence suggests that lower — middle income households have been priced out of renting — let alone owning affordable homes — due to the gentrification of metropolitan centres by upper-income brackets who are less involved politically as a vote bank. This is not just an affordable housing crisis; it is a ticking time bomb of social unrest.

Assuming that state-level planning may have been optimal when presented to decision-makers with every passing administration, political expediency, a lack of foresight, and a sincere desire to implement change have led to an accumulated backlog in affordable housing, leaving Pakistan ill-prepared in practical terms.

Unlike many other countries, Pakistan took almost 55 years to publish its housing policy which was introduced in 2001. It is more than 2 decades old and there is a new housing policy in development which is targeted to be completed in 2025. However, it can be safely assumed that even with consultants advising on the updates, the targets for the new policy would invariably propose the same areas of work and goals as the existing policy.

Moreover, Pakistan has struggled to create sustainable fiscal space, with the most recent resource allocation for housing in the Public Sector Development Programme (PSDP) for 2024-2025 of a mere Rs24.3 billion, representing only 0.13 per cent of the Rs18.8 trillion budget.

Adding to the urgency is the looming spectre of Climate Change, which threatens to exacerbate Pakistan’s housing woes. With floods, rising sea levels, and unpredictable weather patterns becoming more frequent, the need for housing that is not only affordable but also resilient has never been greater. Yet, Pakistan has lagged in aligning its housing strategy with global trends in sustainable development which other emerging economies have managed to start monetising sustainably by affiliating multilateral lenders with domestic banks and developers who are keen to ‘co-fund’ green and resilient housing projects.

A pragmatic approach needs to be taken rather than rushing through half-baked ideas clobbered together with realistic targets and timelines if the impact is to be scalable nationwide.

For Pakistan, a piecemeal revision of the 2001 housing policy won’t suffice. Instead, a transformative “Framework for Affordable, Climate-Smart Housing” is needed – one that embraces innovation, sustainability, and private-sector collaboration.

To address the dual challenges of affordability and sustainability, Pakistan must move beyond outdated policies and embrace a comprehensive, data-driven ‘value chain’ approach which will accelerate the sustainable development of the ecosystem.

The How Part: From the onset, let the business community come up with commercially viable solutions designed within the Public-Private Partnership (PPP) model with proactive facilitation and support of the state machinery assisted by their consultants. This begins with concurrent, collaborative consultations with donors, multilateral and domestic financiers co-creating sustainable solutions with potential project developers as well as a sample cohort representative of small business owners and lower-middle income salaried persons to provide a ‘customer lens’ perspective on affordability, ease of access to finance, et cetera.

It is immensely critical to also identify suitable unencumbered land titles for such projects as many countries offer state land – with defined building codes on concessional leases or grants – outside of urban centres which are fundamental to ensuring that the projects can rapidly ‘come off the ground’.

The state-owned lenders and DFIs, currently focused on lending to SOEs and investing in government securities, need to be encouraged to refocus on their raison d’etre and be mandated to lead the funding streams against time-bound action plans centrally monitored by the Finance division and implemented by the Housing division. The downstream can be supported by commercial banks on the back of partial risk guarantee facilities from multilateral lenders covering the construction at concessional rates by innovative developers compliant with energy efficient and green standards using recycled building materials. Such funding is normally augmented by technical assistance for capacity building to deepen the ecosystem. Concerning the construction guarantees for green housing, since modular affordable housing can be accelerated, such de-risking solutions made available to domestic banks can be released from a project within 18 months and redeployed which helps recycle capital required for more modular affordable housing projects.

On the demand side, domestic lenders are ill-equipped to initially assess informal income and poorly documented small business owners require a high index mortgage repayment guarantee from multilaterals and DFIs. These guarantees should typically cover over 60-70 per cent of the loan amounts to support the mortgage programs of domestic lenders, while Loan-to-Value may initially even be in the high 90 per cent range, and the property title deeds would remain in ‘trust’ and only transferred once full repayment has been completed or sufficiently de-risked to a pre-agreed amortisation level of acceptability. This is vital to unlocking affordable and resilient housing solutions otherwise the targeted mortgage takers will not be even able to cover their markup payment at times of high inflation and default altogether.

Mortgage guarantees also require a widening of credit assessment parameters using unconventional data. This is where the local data analytics talent can get a boost as one has seen several fin-techs outfits design and test risk models using alternative credit assessment criteria where bank statements and credit records are unavailable. Greater use of technology to obtain demographic information, geotagging movement and photos, residence stability, and personal mobility data is being used to augment and enrich credit profiling for scorecards and in turn, accelerate the mortgage approval processes at domestic lenders.

Besides bank lending, ‘impact investing’ is another pool of capital which is increasingly recognised as a viable funding source for affordable housing projects that also yield social benefits. Investors provide capital with the expectation of both financial returns and positive community impacts. This model has been successfully implemented in various countries, directing funds towards projects that enhance infrastructure and services alongside providing homes.

A typical financing mechanism to attract ‘climate’ and ‘sustainable impact’ tagged funding – already earmarked for Pakistan or green housing projects by international donors and global asset managers – involves instrumentation and ringfencing designated streams of concessional debt and non-refundable grants or equity into special purpose vehicles. Debt instruments can nowadays be packaged as ‘green’ covered bonds to draw interest from EU-based investors if it can be demonstrated that the projects are compliant and certified by the Climate Bonds Standard.

All this is typical of how such models have been deployed in other countries. Let’s look at some strategies employed in other emerging economy countries and highlight successful examples of affordable climate-smart housing, which Pakistan can consider localising to the extent customisable with the support of the regulators who should help design robust frameworks.

Mexico launched climate-smart affordable mortgage schemes that enable borrowers to access lower interest rates when purchasing or renovating homes that meet specific energy efficiency standards that promote the use of recycled and sustainable building materials practices among developers.

Initiatives in South Africa have shown promise in bridging the financing gap for sustainable housing projects by enabling local banks to offer loans at lower rates through blended and concessional finance which encourages borrowers to enter the housing market and have decent living.

In Kenya, the government promotes green bonds to attract institutional investors for sustainable housing projects where a local real estate asset manager Acorn Holdings issued East Africa’s first green bonds to fund environmentally friendly affordable housing in Nairobi.

Similarly, in Brazil, green bonds are being explored to finance sustainable construction practices that align with environmental goals while addressing the housing deficit. Furthermore, Brazil’s Minha Casa Minha Vida (MCMV) program is designed with a mixture of government subsidies and low-interest loans, with private sector investment to build millions of housing units for low- and middle-income families. This program exemplifies how PPPs can leverage private investment while ensuring that housing projects meet community needs. A similar theme is followed in South Africa on a PPP basis so let’s try to study and customise for Pakistan’s peculiar circumstances.

In India, the Pradhan Mantri Awas Yojana (PMAY) scheme launched in 2015 exemplifies how government-backed initiatives can support affordable housing through climate-smart mortgages. This program provides financial assistance to low-income families for home construction or purchase while promoting energy-efficient building practices. Over 8.6 million homes have been completed to date in the ‘urban’ areas variant, while 26.5 million were completed and handed over under the ‘rural’ (Gramin) variant, thereby significantly contributing to the reduction of the housing deficit of ‘fit for decent habitation’, addressing up to 8 SDGs directly and indirectly including ending poverty, zero hunger, clean water and affordable clean energy besides others.

Pakistan needs to adopt such innovative approaches linking climate-smart development financing earmarked by donors and investors for climate adaption by identifying and structuring projects that incorporate  ‘resilience’ features such as flood-resistant materials, storm-resistant roofing, elevated foundations on stilts that prepare communities for climate-related disasters such as rising sea and river levels and heavy rainfalls as the country continues to remain vulnerable to recurrence.

Domestic lenders can generate carbon offsets under scope 3 by offering consumer loans on residential solar energy and energy-efficient appliances certified by the National Energy Efficiency and Conservation Agency (NEECA). These loans can be packaged with their affordable mortgage schemes.

Innovative financing solutions are critical for addressing the dual challenges of affordability and sustainability in housing. By leveraging mechanisms such as green bonds, public-private partnerships, impact investing, and technology-driven approaches, domestic DFIs and commercial banks can play a pivotal role in funding affordable green housing initiatives.

By adopting a forward-looking, Development Finance-led strategy that prioritises climate-smart affordable housing, Pakistan can address its housing crisis while fostering economic growth and climate resilience. The question is no longer whether Pakistan can afford to invest in affordable and resilient climate-smart housing – it is whether it can afford not to.

This requires political will and a ‘whole of government’ mindset to encourage the development of robust policy frameworks with the private sector and international stakeholders.

For policymakers seeking to connect with voters and create lasting impact, this is a cause worth championing.

It’s time for Pakistan to turn its housing challenge into an opportunity—one that not only provides shelter but also builds a sustainable future for generations to come.