Urban Land and Housing Markets in the Punjab, Pakistan

Well-functioning urban land and housing markets are critical success factors for achieving robust economic growth. This paper provides an overview of urban land and housing market performance in Punjab Province of Pakistan. It describes the characteristics of well-functioning markets and argues that the Punjab’s present markets are not performing adequately. In fact, there exists a range of impediments to efficient urban land and housing market performance: excessive public land ownership, inadequate infrastructure services, weak property rights, pervasive public- and private-sector rent seeking, counter-productive urban planning policies and regulations, costly sub-division and construction regulations, limited financing for property development and acquisition, rent controls and inadequate property-tax-based revenue-generating mechanisms. The paper concludes by suggesting that a prioritised comprehensive reform agenda is needed to improve urban land and housing market performance in Punjab Province. The analytical and conceptual approach used to research this paper is based on standard neo-classical economics. Therefore, the paper does not address broader political economy or structural issues. Consequently, the paper’s contribution should be viewed as limited in scope.

To foster sustainable economic growth and reduce poverty, the Punjab's main urban centers need to accommodate additional urban growth and support economic development. Well-functioning urban land and housing markets are critical ingredients for success, forming the basis for both private sector growth and the ability to provide shelter to the population. This paper reviews and assesses how well the Punjab's urban land and housing markets function. The evidence suggests urban land and housing markets are not performing as well as they could. Urban land-use planning and development controls are impeding urban development, while land titling and registration systems hamper real estate development. Systems of local resource mobilization and taxation do not generate sufficient revenues to fund key urban infrastructure. The paper notes several critical negative consequences of poor urban land market performance, namely high land and housing prices, large and expanding katchi abadi developments, poorly located industrial estates, inadequate urban infrastructure, and constrained commercial development.
Without effective policy reform, the Punjab's cities will not expand in step with economic and demographic demand, land and housing prices will continue to remain expensive, and inefficient and unhealthy informal development will predominate. Ultimately, unless there is change, these urban land and housing market impediments threaten the Punjab's future economic development.

Setting the Context
The importance of addressing housing and land issues is underlined by at least two factors, namely increasing urbanization and economic development.
While the pace of urbanization in Punjab prior to 1998 has been slower than that in many other developing countries, recent population estimates suggest urban growth in Punjab was double the Pakistan's average in urban areas, and more than five times the province's general population growth during 1998-2001 (Table   1).  Pakistan (1998) and .
Prior to 1998, the majority of the urban growth (74 percent) was generated by natural increase and only 15 percent was due to rural-urban migration (Hasan 2001). However, the recent jump in urban growth may indicate an increasing ruralurban migration, or possibly increased reclassification of rural areas as urban.
Furthermore, the actual level of both urbanization and its growth in Pakistan may be underestimated due to the way areas are classified as urban or rural. 1 For example, the expanding ribbon developments along major transport routes, and peri-urban areas around cities, are still classified as rural even though they have urban characteristics (World Bank 2004a). Much of the urban population growth in the Punjab will be concentrated in the province's five major cities with populations above one million: Lahore, Faisalabad, Rawalpindi, Gujranwala, and Multan (Census Organization of Pakistan 1998). Table 2 Population Trends and Projections, 1981and 2030 Table 2 provides population counts for these cities for 1981, 1998 and 2005, as well as projections of populations to 2030, based on national and provincial trends. The total population of the Punjab's five largest cities will increase from 13 million in 2005 to 31 million by 2030, implying the population will increase by 730,000 annually. Lahore will have the largest share of the increase, with 344,000 persons per year. This rapid urban growth poses unprecedented challenges for urban land and housing markets, and the government's capacity to provide adequate infrastructure to support growth.
As the Punjab's economic development improves, the demand for housing, industrial, commercial, and service facilities will also increase (Jiang et al., 1998).
This will place considerable pressure on land and real estate markets as investors search for plant locations. In addition, as economic conditions improve, there should be an upturn in the demand for residential real estate from workers, expatriate Pakistanis, and foreign nationals operating businesses in the province.
The Punjab's high rates of urban growth, combined with the restrictive environment for provision of land and housing, have resulted in escalating land prices, driving up the costs of infrastructure and urban development projects while diminishing housing affordability. In the long run, rising land prices drive up labor and business costs, reducing a city's competitiveness (Dowall, 1998 In most market economies, private production is the predominant mode of real estate development, for residential, commercial, and industrial facilities.
Furthermore, in well functioning urban land markets, most land is privately owned -public land ownership is limited -usually to less than five percent of the market.
(Hong Kong and Singapore are notable exceptions). With a few exceptions, public provision of housing is miniscule relative to overall production -less than five percent. Private real estate markets typically produce housing that is affordable to households in the 30 th to 40 th percentile of the income distribution, depending on household incomes and housing prices (Dowall and Leaf, 1991 (Table 3). However, this may be an underestimation due to the definition of "katchi abadis," and it is likely that part of the squatter population is not accounted for. ("Katchi abadis" was defined in 1985 as unauthorized settlement on state-owned land of more than 40 dwellings (ADB 2003). Thus, smaller squatter settlements and those on private lands would be excluded). Even with such large slum settlements, household expenditures on housing are reaching levels common in developed countries, although private construction industry is mostly informal and housing finance, at less than 1 percent of GDP, is essentially non-existent.
Formalization of slum and squatter settlements cannot be looked at in isolation from other reforms that are the actual cause of informal housing, i.e., restrictive land and housing policies and regulations, distortive taxation, etc.
Furthermore, formalization of slum and squatter settlements, and the associated increase in property values, may displace the poor tenants, as oftentimes is the case with small scale formalization. However, when formalization is carried out on a broad scale, more poor landlords have the incentives to consolidate and expand, ensuring a more elastic supply of rental housing (Galal and Razzaz, 2001). Thus, achievement of desired benefits and more efficient housing and land markets require a comprehensive approach to the reforms.
A related issue is overcrowding. While data are not sufficient to fully assess overcrowding in Punjab, the average household size in the lower deciles of income distribution was almost double that in the higher deciles in 2001/02. The number of people per housing unit increased in Punjab but decreased elsewhere, and indicates constraints in the province's housing market.  (Dowall, 1991b).
Inadequate trunk infrastructure and services to residential areas Another reason for constrained urban land supply is that most cities are not able to finance the construction of infrastructure to support development; there are enormous backlogs. For example, Lahore needs to spend Rs. 55 billion (US $ 0.9 billion) over the next five years to close its infrastructure gap.
Unfortunately, Lahore's current annual public spending of Rs. 1 billion is only a fraction of the need, estimated at Rs. 11 billion p.a. (Dowall, 2004).
Private developers, including housing societies and cooperatives, routinely face the problem of inadequate availability and/or significant delays in the provision of infrastructure such as roads, water, electricity, sewerage, and gas by public authorities/agencies (Aries Group et al., 2004;FIAS 2005b). This not only increases the costs to developers, but also increases financial risks of real estate projects, limiting the availability of financing, particularly from the formal private lenders. Thus, developers (as well as buyers) revert to savings and informal financing, which is broadly available but very costly. Furthermore, regulations require the developers to pay a large portion of infrastructure costs up-front (25 -50 percent in Lahore 7 ). These factors, combined with the above discussed distortions and uncertainty in regards of property rights, translates into high property prices that are affordable only to a small portion of the high income population and businesses.
Public agencies plan their infrastructure investments based on city master plans and program investments, not economic reality (i.e., "actual demand").
Furthermore, most infrastructure investments are made, and services are provided by, central or provincial government agencies, including Development Authorities.
There is little role for, or coordination with, the local governments. Due to highly subsidized services and limited financial capacity of local governments, the available funding for any investment is very limited and insufficient to meet ever-  Water and sewerage services in Punjab are not reliable, nor are they sustainable. In major urban centers of Pakistan, a typical daily service of water supply is nine to ten hours, and service coverage is 32 percent (Ministry of Water and Power of Pakistan, 2002). Furthermore, waste water, including that from industrial consumers, is disposed of without treatment, creating an increased risk to environmental and water pollution (World Bank, 2004a A similar situation is observed in solid waste management. In Lahore, solid waste collection is estimated by LDA (2004)  The situation is further complicated by benami (documented, but unrecorded) transactions (World Bank, 2002b;Mahmood, 2004  Corporations, Cantonment Boards, and others (World Bank, 2005b). Furthermore, most records are kept manually.
The above situation leads to property records being highly incomplete and unreliable. It is estimated there are over a million land-related disputes pending court resolution in Pakistan, composing 40 percent of all court disputes (FIAS, 2005b). Thus, court proceedings take years to resolve.
Experience in many countries also shows that establishment of clear property title has great potential benefit. Residential plots with clear titles in Jakarta sold at a 45 percent premium over comparable plots without a clear title 9 .
The risk of eviction lowered the value of housing units in Manila by 25 percent. 10 Titling resulted in property value increases in Davao (the Philippines) and barrios of Counterproductive urban planning and development regulations Urban planning practices and associated regulation also limit the supply of urban land. Planners seem more interested in controlling urban growth than in framing plans and strategies to accommodate growth and promote economic development (World Bank, 2004a Contrary to the intention, the proposed zoning and subdivision regulations are more likely to reinforce the current trend of low-density ribbon development; land subdivision regulations could exacerbate the slow pace of construction in Lahore. These issues are particularly important considering the difficult procedures for the commercialization of residential property and rapid urbanization, and are likely to impede the formation and growth of small businesses (World Bank, 2004b).
In terms of urban land regulations, highly restrictive floor area ratios (FARs) appear to be the main constraint limiting the density of urban development. In Lahore, FAR is set uniformly low at 1:1.5. However, in some areas (for multi-story buildings and along major routes), the ratio is set at 1:4 (World Bank, 2004b). In contrast, FARs in center business districts (CBDs) of most large cities in other countries are set at much higher levels of five to 15 (Bertaud 2004).
A FAR set significantly below the level of its market equilibrium has a number of negative consequences and imposes large costs on the city's economy.
It increases the demand for land across the city as more land is required for the same amount of floor space (World Bank, 2004b.) A paper by Ohls, Weisberg, and White (1974) showed zoning regulations restrict the supply of land available for development below the level that would be normally exchanged in the market increase land prices. A model developed by Lin, Mai, and Wang (2003) demonstrates how a uniform restriction on the FAR encourages non-productive use of housing capital, raises equilibrium housing prices, and lowers city growth. In contrast, an increasing FAR towards the city center boosts the productive use of housing capital and reduces housing prices, thus fostering the city's economic growth. Low FARs also cause greater dispersion of economic activity and housing, reducing the benefits of agglomeration effects 13 and requiring lengthier trips.
Furthermore, low FARs limit the quantity of available formal housing within the city's boundaries. This results in greater population densities in any given location within the city, as well as contributing to escalating land and housing prices as already experienced in Lahore. As a result, the poor and lower income households are priced out of the market. In less restricted real estate markets, private developers are able to adjust to the increasing demographic and economic pressures, and rising land and construction prices.
Low FARs have other negative effects, such as lower incentives to invest in development and redevelopment of available land, as discussed by Bertaud and Brueckner (2003), and reduced residential mobility. Restricted mobility affects those in the lower deciles of income distribution the most, as their access to jobs are reduced due to increased transportation time and costs. If the minimum land consumption is not limited or is set sufficiently low, low-income households could afford to locate anywhere in the city. However, when regulations impose low density, the minimum amount of land required for a unit of floor space is usually above the affordability level of the poor. Thus, they are forced to locate further away from CBD and, consequently, from the job markets. Segregation of the poor occurs due to the combination of such restrictions with the increasing costs of land and urbanization. A greater number of people are forced to choose illegal housing and business space arrangements, and sacrifice the level of living and work conditions. These restrictions have even further negative effects on the environment, due to greater pollution and the need to convert more agricultural land to urban use, to accommodate the artificially created excessive need for urban land. 14 The magnitudes of these phenomena indicate there are important structural and regulatory constraints affecting housing and land markets in Punjab.
To understand the underlying factors and possible causes, the paper reviews the available information in the key areas related to urban housing and land markets in the province: socio-economic context, regulatory framework, urban planning, provision of infrastructure and government programs, and subsidies. Thereafter, the effects of this environment on the housing and land markets are discussed.
For example, Malpezzi and Ball (1991) showed a positive correlation between the general distortions in a country's economy and house price to income ratios in developing countries, i.e., the larger the distortions, the higher the house price to income ratios. Empirical evidence also demonstrates that land markets are rather efficient in capitalizing the impacts of regulation, local public goods, amenities and tax policy, i.e., any discounts (premiums) for restrictive (beneficial) policies and regulations are to a great extent included in the market prices of land. 15 In Malaysia, the annual costs of inappropriate land-use and housing development regulations were estimated to amount to three percent of GDP in the 1980s (World Bank, 1989a). In Seoul (South Korea), site planning regulations, subdivision controls (i.e., setbacks, plot and street widths and lengths, etc.), FAR limits, and building codes resulted in a built-up area to land ratio of 0.56 in late 1980s (Dowall and Clark 1996). In an environment of rapid growth, such restrictions fueled land price escalation averaging 24 percent p.a. in Seoul during 1974(Kim 1991. Contrary to Seoul, more liberal land and building regulations in Bangkok (Thailand) and Bogota (Colombia) allowed developers to adjust construction densities under increasing demand and cost pressures (Dowall and Clark 1996).
In an environment where developers and households cannot adjust construction densities, i.e., increase built-up area relative to the underlying land plot, more people resort to informal solutions. For example, in Karachi in 1988, the average price of a house in a planned housing estate was equivalent to 8 times the average annual income of low income households. Thus, families resorted to informal housing in katchi abadis at a quarter of the cost of planned housing (Dowall 1991a).
While government interventions such as land regulations, property rights, taxation, and infrastructure investments are necessary, they become serious obstacles to development of cities when designed poorly. In choosing the level of regulatory intensity, the government implicitly determines the characteristics of the consumers it wishes to attract (Thorsnes 2000). The critical issues are ensuring balance between the government control and market discretion, and the benefits of regulations and the costs of compliance.

Subdivision and construction standards
Established minimum construction standards affect affordability and implicitly establish the "minimum income" for formal housing and land owners; residents as well. For example, in Jakarta (Indonesia), the minimum land plot size, planned population densities (similar to FARs), and restrictive zoning that had little relationship with the market trends, were estimated to make land affordable to only 5 percent of the urban population (Bertaud 1989).
There has been no recent study of the housing standards in Pakistan or land is set at a mere two percent. 16 Similarly, only two to three percent of land in a typical government land development scheme is allocated for commercial properties. Overall, these requirements create perverse incentives for private developers and make it very difficult to produce affordable housing (for example, they can only sell 50 percent of the land they have acquired).
The large minimum size of a housing project forces new residential developments further and further away from a city center, as land plots available for construction tend to be smaller towards the center of a city. Furthermore, large project sizes exclude smaller developers from the formal market; thus, reducing competition, particularly in the lower-end market. The two percent limit for commercial property also limits the availability of new space for businesses.
Therefore, it is not surprising that economic development and increasing demand for commercial land translates into skyrocketing prices, due to highly inelastic supply. In addition, most poor live in the areas of their employment, due to the fact they can not afford the costs of daily transportation. Accordingly, segregation of residential and commercial areas, and allocation of such a small portion of land for commercial purposes, works contrary to pro-poor policies, forcing people to resort to informal arrangements, either for housing or for employment.

Limited Formal Property Finance
Another impediment to affordable housing production is that housing finance is very limited in Pakistan, compared to other developing countries in the region and around the world. The outstanding housing loans amounted to US$ 0.4 billion or 0.6 percent of GDP as of December 31, 2003, which is among the lowest levels in the world (Aries Group et al., 2004 andWorld Bank, 2002a). The main reason for the limited availability of housing finance is the weak enforcement of lenders' rights (mortgage / property rights) and foreclosure laws (for more details, see World Bank et al., 2004;Aries Group, et al., 2003). Funding does not appear to be an immediate issue, due to the recently increased liquidity of the financial sector (World Bank, 2003b). Access to long term resources by mortgage lenders, however, is necessary for the longer term development of mortgage lending.
In order to address this situation, the Government has undertaken a However, this procedure is currently undergoing an ultimate test as two recent cases have been taken to the superior court. Furthermore, it may take some time for the lenders and borrowers to accept the new procedure as a general industry practice.
The credit regime for housing finance was also recently liberalized by raising the limits for the bank exposure to the housing sector from five to ten percent of their portfolios, increasing the maximum loan to value ratio to 80 percent, increasing loan limits to Rs. five million (US$ 83,333) for individuals and Rs. 7.5 million (US$ 125,000) for groups, and extending the maximum loan term from 15 to 20 years.
The combination of a recent stabilization in the country's economy, the government steps toward liberalization of the financial markets, and the strengthening of lenders' rights are gradually changing the environment for lending. However, for the majority of the population, broad access to formal financial markets will require addressing the underlying sector constraints such as strengthening of property rights, and streamlining housing and land market operations.

Rent Control
Rent control thwarts the construction of new rental apartments and stifles the maintenance of existing units. The current rent control legislation (Punjab Urban Rent Restriction Ordinance of 1959) provides extensive tenant protection for residential and non-residential property and land, when combined with higher taxation rates for rental units, discourage investment in rental property.
In general, the law provides for no rent increase for a three-year period. In the case of land and residential premises, rent can be increased during the three- year period only if some addition, improvement, or alteration to the property has been made by the landlord at the request of the tenant. For non-residential premises, the law allows for an automatic increase in rent by 25 percent every three years.
In the case of tax increases, the landlord may charge the tenant only half of such increase and only upon the approval by the Controller. The Controller is a judicial officer appointed by the Provincial Government, given sole authority to determine the fair rent for land and residential premises, fairness of eviction, building maintenance, conversion of residential building into non-residential, etc. Rent control, to a greater or lesser extent, is usually imposed as a blanket measure, which is also the case in Punjab. Therefore, the benefits are distributed to the general population rather than targeted to the poor and vulnerable, resulting in significant leakage of benefits to the higher income residents. Although rent control is intended to help the poor, oftentimes it does not, as most of the poor in developing countries live in informal settlements that are not covered under rent control and/or are not familiar with the rent control legislation. 17 Reforming rent control may require a gradual process, as an abrupt elimination may result in immediate shock that would hurt those in the lower deciles of income distribution most, and may prove difficult to implement from the perspective of political economy. Including the case in Punjab, oftentimes rent control is only one of several, and not the most important, factor causing shortages of developed land and discouraging investment in housing (Malpezzi and Ball, 1991).

Distortive Taxation
Property taxes are important revenue sources for local governments in most developed, and many developing, countries. In Punjab, however, in the total revenues of the five largest cities (Gujranwala, Multan, Lahore, Rawalpindi, and Due to the stringent rent control legislation, the rental value of property is also much lower than its market-based rental value would be, resulting in lower property taxes. The capital value is one instrument which is by and large, though not 100%, neutral from rent control. Preliminary analysis (World Bank 2004b) of the assessment system used in Lahore and other cities indicates that four to five fold increases in property tax revenue is possible by de-linking property taxes from rental values. In addition, collection efficiency also appears to be low in Punjab, as Lahore collected about half of the amount due to it in the form of property tax.
Given the limited revenue generating capacity of the property taxes, it is not surprising that stamp duties have become the main revenue source for local governments. In the five largest cities of Punjab, the majority of tax revenues (87 percent in 2002/03) came from the stamp duty on property transfers (Table 6). Reform of property taxation towards a more value-based tax system would not only generate more revenue for the local governments, but align the interests of local governments with those of business development, as an increase in property values would result in an increase in government revenue.
Due to their significant role in local finances, reforming stamp duties is also not a straightforward and easy task. Nevertheless, Punjab government has made significant improvements in this regard, and reduced its stamp duties from five to nine percent, and fees from three to 0.5 percent in 2003 (Table 7). duties, but from other taxes such as income, sales, and property taxes (World Bank 2004a). In contrast, the initial experience in India (Maharashtra, Punjab, West Bengal), as well as Pakistan, indicates a lowering of stamp duties results in increased, rather than decreased, government tax revenue (Alm et al., 2004;Ali, 2004 for India and Pakistan respectively).
The proposed Punjab Finance Bill for 2004 provided for further reduction in stamp duty on property transactions to two percent. 18 While this would bring Punjab more in line with the other provinces of Pakistan, it is still high relative to other countries such as China, Philippines, and Singapore. 19 Other fees are also levied in Punjab, such as those on the registration of rental contracts and change of property use. For example, land commercialization fee is set at 20 percent of the value of the land. 20 Due to low tax revenue, the governments have limited resources for provision of infrastructure and services. It has adverse effects on the quality of services and, consequently, residents' willingness to pay not only service changes, but taxes in general. Clearly, distortive taxation policy leads to a vicious circle.
As the national government has started to realize the negative implications of its tax policies, it has envisaged significant reductions in stamp duties and fees in the NHP. The government has also established a committee comprising federal and provincial officials to examine the provincial tax regimes and prepare recommendations for their rationalization and reform.

Complex Institutional Framework
The overall responsibility for planning in Punjab has been assigned to formation.
Punjab appears to have fallen into a common trap of "too much government" in the areas of zoning, planning, and regulations, and "not enough government" in regards of property rights, provision of infrastructure, and facilitation of the private sector involvement, as described by Dowall and Clark (1996). Experience so far indicates that this approach has not been very successful and has resulted in highly inefficient housing and land markets. In order to better assess the effectiveness, costs, and benefits of the different programs, more information is needed. However, experience in other countries indicates public housing and land development, and slum upgrading programs, are generally less effective in addressing housing and land shortages than elimination of the numerous restrictions on the housing and land markets (Bertaud 1989).
Furthermore, studies by Aaron and von Furstenberg (1971), Bradford and Shaviro (1999), and Friedman and Weinberg (1982), show that in-kind subsidies such as allocation of land and housing at sub-market prices and provision of free infrastructure introduce large inefficiencies, usually because the value of the asset to the recipient is lower than the cost of its provision to the government. This results in strong incentives for speculation and resale of property. The extent of the inefficiencies is closely related to the size of the subsidy and elasticity of housing substitution for other goods, and was estimated by Aaron and von Furstenberg (1971) at eight to 60 percent depending on the size of the subsidy. At the same time, limiting the occurrence of resale usually requires extensive and costly government controls.
In-kind subsidies such as subsidized low-income housing projects also tend to reduce residential mobility of the poor, as the subsidy is tied to the location (Bertaud, 2004). While well-designed government assistance would be necessary to ensure adequate housing supply for low-income groups, addressing the policy constraints is crucial for the market, to be able to cater to the needs of the higher and middle-income groups.
Based on the experience so far, and the ever-increasing demand for housing and developed urban land, it is clear that the government will not be able to address the needs through direct interventions in the market. Other means will be necessary. One of these important aspects is facilitation of greater involvement of private industry. Therefore, understanding the regulatory constraints to more robust private sector engagement in real estate development is a critical part of the analysis.

Concluding Remarks
The key conclusion of this paper is that increasing urbanization and economic development are imposing ever greater pressures on the housing and land markets in Punjab. However, the observable market characteristics, such as rapidly rising property prices and housing expenditures, large informal settlements, limited investment in housing, and small formal mortgage markets indicate significant potential distortions. This paper has pinpointed a range of impediments, including: excessive public land ownership, inadequate infrastructure services, weak property rights, counterproductive urban planning policies and regulations, costly subdivision and construction regulations, limited financing for property development and acquisition, rent controls, and distortive taxation mechanisms.
To improve the functioning of urban land and housing market performance, these constraints need to be alleviated.
Any reform agenda should be comprehensive and coherently link together the full range of needed actions. As demonstrated by Galal and Razzaz (2001), the absence of a comprehensive approach, or "road map," to guide the design of reforms, often produces reforms which focus too narrowly on a single issue such as land registration, mortgage finance, or slum regularization. While such reforms provide positive results, their impact and sustainability can be undermined by distortions in other areas. Thus, achievement of desired benefits, and more efficient housing and land markets, require a comprehensive approach to the reforms. However, since it is not possible to launch all reforms at the same time, prioritization and sequencing are important. Furthermore, "successful implementation requires more than just issuing new laws or regulations. It requires changes in incentives, institutions and behaviors." (Galal and Razzaz, 2001) Finally, any reforms require political commitment from the policy-makers.