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Meltdown of Karachi Real Estate or A Correction! Dec 06

December 6, 2015

“Tulip Mania” or “Tulip Bulb Bubble” is considered to be the first known Financial Bubble that occurred in 1636-37. It is connected with the Dutch culture and its history, which was introduced by the Ottoman Empire in the mid 1500’s.

During that period Amsterdam was one of the richest cities of Western Europe, as Nederland was very active in international trade stretching from Turkey to Indonesia and was enjoying the status of Dutch East India Company.

It was Sultan of Turkey that had sent Tulip Bulbs to Europe. Dutch active in trade imported bulbs, Tulip plants grows from its Bulb plantation that has colorful petals become status symbol in the Dutch land.

It was sold at extraordinarily high premium.   Prices climbed so sharply that bulb that was sold for One Guilder was sold at a price 60 times higher. A Bulb of a rare Tulip Semper Augustus that was priced around 1.000 Dutch Guilders was sold at Guilders 5.500 before the crash occurred, which was roughly the cost of a luxurious house in Europe.

Though the accuracy of figures and data cannot be confirmed, but some of the past record suggest that by the mid of first quarter of 1637, a Bulb was worth a craftsman’s 10-times annual salary or was worth 1.000 Pound of Cheese or Two Tons of Butter or cost was equivalent to 12-Fat Sheep’s or 4-Oxen. The popularity of trade became so popular that in 1636 it was traded in Amsterdam Stock Exchange, stretching beyond the borders to trade in London Stock Exchange but could not gain momentum like it traded in Amsterdam. People in Nederland were so crazy that even sold their land and houses to trade Tulip Bulbs.

Suddenly a default in a Tulip Bulb Contract by a Buyer in Haarlem was the popping point that caused the Tulip Bulb Bubble to Burst. Finally, it was Dutch government that had to intervene to buy each contract at 10 pct of its face value. But it is said that sale were made even at lower prices, as large number of individuals were not holding contracts.

One of the recent biggest financial market related event is US Housing market crash of 2007-08, which is considered worst in US History. Imagine that from 2003 to 2007 Sub-prime loans had increased by whooping 292 pct to USD 1.3 Trillion from USD 332 Billion. And when credit market froze in the mid of 2007, deterioration began was rapidly.

Though presently somewhat strong and stable, it will be interesting to see the impact of US Interest Rate Hike that if it pricks the Popping Bubble, a mistake they made in past to tackle the speculative bubble in the Stock and Housing market.

Housing market normally takes 5-10 years to recover. Since 2008 until June 2015 Spain’s housing market lost 54 pct of its value before making recovery due to foreign buying.

Italian Housing market that rose by 70 pct from 1998 to 2008, started melting after the European crisis and has so far lost 25 pct of its value. Though pace of decline in prices have slowed down, it is unlikely to recover until next year of after.

According to Halifax, UK housing market until Dec 2007, enjoyed the best period surpassing 200 pct growth in 10-years, before a perfect storm hit its property market in 2008. The pin that burst the bubble was credit crunch.

However, unlike Euro-zone crisis, which is still in a struggling mode, UK economy was differently placed and its housing market started making recovery after falling by 19 pct between 2008-09. Since then it has so far grown by nearly 24 pct. Although volume of property transaction has completely collapsed, as it has fallen by over 35 pct since 2008.

Similarly, Dubai property market that climbed 32 pct from 1st half of 2013 to the 1st quarter of 2014 looks vulnerable. Further correction cannot be ruled out. Falling global oil prices could weigh as Middle East oil producing and Asian investors could shy away.

Let’s have a look at the Pakistani market. About 22-years ago, a Bank’s Treasury Head called me and said that his Bank President who is still a CEO of a Bank in Pakistan was approached by a popular businessman who would frequently commute between Karachi and Dubai and asked him for his help. He wanted to place his funds in Major Currency instead of Pak Rupee in a Pakistani Bank. And this cash money was against sale of 200 Plots. I do remember that the impact was so huge that the Real Estate prices in Karachi started melting down in next 30 days and did not recover for next 7-8 years. It was soon after 9/11attack, money once gain started flowing towards Pakistan.

I am not sure that how many of you are aware or heard of  Current Sharp Fall in Plot Prices that was triggered sometime in November 2015 in Karachi in DHA Phase 8.

This news has not appeared on Television or in Print media, as on most occasion our media refrain/avoid from providing any such news or information that may have sever adverse Economic or Financial impact in our market. It is obvious that such News Headline is not in their best interest.

To me, it came as a shock when I first heard that Plot prices in DHA Phase 8, fell by nearly Rs 10 Million. I rushed to call Real Estate Brokers to check if this News is true or not and I spoke to 3-different people. Initially they were hesitant to speak, but finally they all did confirm the fall ranging between 10-25 pct respectively.

It all started, as market became jittery when Buyers refused to honor their commitment. Some of the Buyers after paying 10 pct advance purchase money backed out from honoring their commitment on the settlement date. This disrupted the chain of events as the middleman was caught wrong footed when Genuine Buyer’s refused to honor the deal at the time of payment date. In Real Estate business middleman often steps in to make quick buck, which is always a risky affair because he is not the genuine party involved in the contract.

What bothers most is that is this slide temporary or there is a pin somewhere around that has already burst the bubble? Or what else could have caused this mini crash?

Globally, Property market is mostly highly leveraged, which is why risk of Bubble and Burst is unavoidable. But unlike global markets our market is not leveraged and has no such risk.

However, mechanics of our Real Estate Market is entirely different from the rest of the world. Our Economic woes have almost reached point of no return, but we do not bother to correct ourselves by applying “The Simple Economics of Injunctive” theory.

At current trading price our Real Estate market is documented by merely 10-15 pct, which is hostage to all concerned authorities. This is obviously due sheer greed and nothing else. This disparity is one of the major causes of severe Social unrest. Higher price is not an issue, but tax should be applied on the actual sale value of the property.

After doing a market survey, the outcome is that the genuine buyers are the Bankers in a very large percentage because they are entitled for housing loan at easy mark-up rates. There are other Buyers too, but they are very few in numbers.

Let’s do some working to get close to the actual number. In Pakistan there are above 10-Banks President and CEO that enjoys monthly Salary ranging between Rs 8 Million to Rs 13.5 Million or roughly gets Annual Salary ranging between USD 900.000 to USD 1.5 Million plus they enjoy performance bonuses as well. This is exception and they will not pile property in Pakistan.

Others do not enjoy such High Pay Scale, Monthly Salary from Vice President to Senior Executive Vice President (SEVP) Ranges between Rs 200.000 to Rs 2.5 Million. They get annual performance bonuses roughly ranging between Rs Half a Million to Rs 15 Million. This means they are roughly entitled for a Housing Loan between Rs 8 Million to Rs 40 Million, with roughly is 33 pct deduction from salary that normally has a 20-years maturity life. Calculation is based on Salary and Age.

Based on above facts, it is even tough for an SEVP to purchase house or plot with ease. Furthermore, banks legal department does not allow purchase of plot in underdeveloped area nor banks allow purchase of Duplex House, which built after dividing of plot that does not have lease “A”.

The reason banks do not allow Duplex House is simply because it is only registered at DHA office, but Mutation is not allowed by Cantonment and Military offices. Any property without Mutation is Risky because Buyer of Duplex House case owner does not get “A” Lease and gets a “B” lease with a Photocopy of “A” Lease is legal owner. Interestingly the price of New 250 or 300 square yard house ranges between Rs 40 million to 60 Million. So this is trap, as Realtors are the builders. They obtain permission from DHA office and try to find a Buyer.

What else is stopping the Buyer to Shop? Withholding Tax (WHT) is the spoiler because all those not paying do not want to get registered with the Tax Authority.

Despite lot of hue and cry Currency in Circulation since June has risen by approx Rs 125 billion, which nothing. There is possibility that good part of withdrawal could be purchase Cash US Dollar from Kerb Market that may have pushed Kerb Market Rate.

More importantly, after the political decision taken in consent with of all those concerned to get hold of those involved in various types of Corruption, illegal activities and heinous crimes especially in Sindh. All such elements went into hiding and will stay away until there is change that suits them, which may not happen anytime soon.

One thing is for sure that “Cash is King” and “Cash Crunch” is here to stay for longer than anticipated, which means more dip to come unless old situation is back to square.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transactions)

  1. Sir what is the prediction for 2016 ???

  2. sorry to say there is no meltdown or cooling in the marktet :p

  3. So your reply tells that you are a Real Estate Broker. 😉

  4. bro i am a software engineer in Abu Dhabi Government, i want to buy a decent home but unable to find one even for 18 millions in Nazimabad area

  5. Gulshan permalink

    Any updates

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