On saturday state bank cut the discount rate after 1 year by 0.5 percent, bringing it to 9.5 percent. Since i work for a bank, i know it triggers the economy by reducing borrowing costs overheads. Today the karachi stock exchange is also rising by over 300 points. What do seniors think will be its impact on property? My observation suggests that prices might see an improvement.
I think real estate is not mainly based on loans so I don’t think it will affect real estate that much. But I’m no expert and could be wrong.
It's not a major cut in percentage terms. It will not have a major impact. But if the trend continues as government has indicated its policy by the this cut, it will have some impact in future.
It seems that if the thing goes in right direction, interest rates will further be reduced slowly till 8% . Interest rate at Musharraf era level will see jump in property. But all this would be really slow as this government discourages property.
I am not an economist but just my view. I may be wrong. But this question is quite important.
Its an interesting question. I am no expert on the economy but somehow I think there is a link. I just googled it and found out last time SBP lowered interest rate was in December 2012, and it was the same i.e. From 10% to 9.5%. We all know that after that, prices starting to gain appreciably and specially after June, it was like an earthquake, prices even tripled in some places! In November last year, SBP again raised the rate to 10% and since then property market has been falling or stagnant.
Again, it could be plain coincidence, but I think there could be some relationship. Maybe Raza sb you being a banker yourself, or Sayeein sb or anyone else knowledgeable on this matter can enlighten us.
@Junaid. I agree that mortgage financing plays hardly any role in Pakistani real estate market.
@Kashif. I am not sure whether the instance you have quoted can be used as an analogy, as there may be several other factors at work. However, I can try and explain the cause-effect relationship the way I understand it.
When discount rate is cut, it is not only applicable on loans (mortgages) but also on deposits. Soon you will see all banks cutting the returns they offer to their depositors and same will be the case with National Savings schemes. Remember, Govt has already increased the withholding tax rate on deposits for non taxpayers from 10% to 15% further reducing returns for black money holders. Reeling from this double hit, they will withdraw their money parked in saving instruments and look to invest elsewhere for better returns.
In Pakistan, there are only three places where this money goes, stock market, FX currencies and property. Stock market is already overheated and sharp investors will avoid heavy exposure. FX market is being tightly controlled by govt so opportunities there may be somewhat limited. This leaves property market as the only available option.
Typically, lower rates also put a pressure on the value of rupee and if Govt allows rupee to weaken, it would cause another feedback effect through inflation.
This is my understanding of how this system works and because of this, I think property prices might start improving after 2-3 months. However, anyone who can offer a better explanation is welcome to share his views.
@Raza. Your explanation seems very logical and makes good sense. I hope what you are expecting happens and property starts to pick up. But why do you think it will start after 2-3 months? Any specific reason for that as the State bank has already cut the rate?
Secondly, I want to disagree with your use of the term "non taxpayers". Every citizen in this country is a taxpayer including small children. Everyone is paying taxes in the form of either Income tax, withholding tax, GST, levy, surcharge etc. What people don't want to do is to file their returns with the blood sucking tax dept, who then target and blackmail anyone who comes in their tax "net". As a result, even those people who are exempt from income tax are being forced to pay taxes. This is nothing but extortion, and after that, the same people are labeled as "non taxpayers" and penalized further.
I think I became very critical in my last post so it is now being held up for moderation!
Kashif I cannot argue with your definition, maybe the right term to use should be filers & non filers but that is not what FBR calls them , maybe to hide their inefficiency. Anyway they will be penalized from now.
2-3 months time period was mentioned as a time lag for a policy to start showing its effects. If there is another cut in January, I would absolutely dive into property.