The minor impact of Covid-19 on housing finance
Arun Kumar Chowdhury and Nayeem Shahriar
What is your lifelong dream? To get married? To own a car? Ask yourself. Almost everyone dreams about the same thing-A house. A permanent shelter of one's own. It is the longest term goal of most of the citizens in Bangladesh, also in the world. The need for a proper shelter rehashes one of the largest industries in the world. The housing industry is one of the leading industries in every country and more developed the country is, more developed and deeper its property market is and as it is a growing industry, recently it has drawn attention in developing countries also. Infrastructural development is not less dispensable than the industrial development as it falls in with the basic human need -- a roof over the head. We have mentioned earlier property market to expound the development of a country. Land market is the most important segment of property market because you have to build a house on the land, you can't build your castle in the air. Our technology is not that much advanced yet! So, the land market has the most close-fitting relationship with the housing market as to acquire a shelter, one needs to obtain a land first and then construct on it.
The housing sector not only provides physical shelter but also affects the citizens in terms of increasing security, skill enhancement, health, financial stability and socio-economic dignity. Housing is essential but when you need a proper housing facility but don't have the financial ability, then you go to the lender and get a loan for constructing or purchasing your residential or commercial building or apartment. That is defined as the housing finance and it is a significant segment of the economy. In a developing country like Bangladesh, affordable housing and financing for it is a major challenge as a big portion of the citizens are from the low and lower-middle income group and they are being unserved.
There is a pandemic going on and it has made the socio-economic scenario very much cluttered in every country of the world in an abrupt shock. All sectors of the economy are badly stroked with an immediate impact on both businesses and services. In March last year, when the government of Bangladesh announced 66 days of general holiday to contain the pandemic, it had affected the communication sector, food industries, aviation, tourism and hospitality sector and obviously almost every kind of small and marginal businesses. Only some sectors like pharmaceuticals, medical equipment, e-commerce and ICT sectors resurfaced. The housing sector has more than 450 product-based sub-sectors and the impact on this sector and its corresponding sub-sectors were apparent. After the announcement of the general holiday by the Government, all the construction work got postponed. The millions of construction workers were highly affected in the economical standstill. But like the other sort of construction projects, housing construction hasn't been affected that much as expected. Housing finance sector is less affected than the other sectors amid the Covid-19 pandemic. This fact seems surprising but let us explain. First, after one year of this pandemic, many people have given up the habit of taking food from outside, many people have given up the tendency to purchase consumer goods, unnecessary clothes, tours, travels, etc.; even postponed the decision to buy luxury goods such as cars due to the economic recession. But what portion of people postponed their residential construction projects till now? We are not saying that no-one did postpone their projects but a little number of people had delayed their construction projects amid this pandemic.
Secondly, the housing sector is being timbered by the residential construction work. The lockdown and utmost economic standstill of Bangladesh were subsisting in April to June last year, which was the wet and stormy season while construction was usually being stalled due to the rain. So, the effects of the pandemic were very low in constructing, repairing or vertically developing a house. Flat or apartment purchases are functioning mostly at major cities like Dhaka, Chattogram or Sylhet. Most of the buyers of the modern apartment didn't deduct their plan to purchase but postponed for a few months. As the lockdown was lifted, this branch of the housing sector got active.
Third, the clients who took mortgage or home loan were affected directly for the economic downfall and there is no doubt about that. But who takes the home-loan usually? For that answer, we need to know about two contingents. One is the existing housing finance providers and the other is the targeted clients and their income-group. As financing for residential housing and commercial housing is an emerging and fast-growing market in Bangladesh, many entities are investing in this sector The commencement was induced by Bangladesh House Building Finance Corporation (BHBFC) by the presidential order-07 in 1973, which manifested the desire of Bangabandhu Sheikh Mujibur Rahman with a vision to improve the living standard of low, lower-middle and middle-income group of people through resolving the housing problems. Various financial entities like state-owned commercial banks, privatized commercial banks, non-bank financial institutions, specialized Delta Brac Housing Limited and National Housing Finance and Investment Limited have tooled their investment in the housing sector to fulfil the demand for housing finance. Privatized financial institutions had disbursed 88% of total housing loans in 2019, but their target customers are from upper and upper-middle-income groups as they sanction the loans by assessing their eligible clients for their monthly/yearly income. But state-owned banks and especially Bangladesh House Building Finance Corporation (BHBFC) are scheduled to facilitate the lower and low-middle income group by assessing the rent feasibility, not the customer's earning. On the other hand, where state-owned financial entities are trying to disperse their housing loan operation in every district, even upazilla sadar in case of BHBFC, the privatized financial entities have confined their housing loan operations to metropolitan areas and focused on Dhaka and Chattogram cities and occasionally in district Sadars. So, the major share of their home-loan clients are middle-class and upper-class income people, where the large portion of low and lower-middle income groups are remaining unserved because only specialized BHBFC is missioned to provide home-loan facilities to these income groups with its limited funding. The upper and middle-income groups aren't affected much as the low and lower-middle income groups, for, the small businessmen and jobless employees do not belong to the upper-income group. Due to the pandemic and economic recession, the home-loan portfolio might show decrement, but it is not that severe as the other sectors of the economy. Though there is an oscillation in loan repayment, demand reduction, limitation in pursuance of foreclosure enforcement, soppier property market and an alarming rate of the intentional defaulter; with refinancing, rescheduling and forbearance initiative such as stimulus packages, these minor effects can be averted soon.
The favourable thing about housing finance market amid this pandemic is it is illiquid. Housing or mortgage market of Bangladesh is not that deeper in operational activities yet. The depth is determined in terms of mortgage debt outstanding to GDP ratio above 15 per cent, which is not the case for Bangladesh. So, the vulnerability in the housing finance system is lower compared to other financial markets in the knock-on effect of the Covid-19 pandemic.
There are some reasons behind the insignificant effect of the pandemic on housing finance compared to other sectors. Around 95 per cent of constructing, developing or purchasing a residential building, individual house or apartment is are done with self-finance. So, the impacts on housing finance entities are not directly affecting every construction project but only the mortgage market - to be clear. As housing is a durable good and a viable source of income, the investment in the housing sector is secure and it has a long term repayment schedule which makes the monthly instalments endurable to clients. There is no risk of being broke for investing in the housing sector as it is a very stable sector of the economy. Amid this unprecedented pandemic, housing sector investment will not be constrained like other sectoral investments because the values of the property always increase. Our study shows, though there were one or two units of a house that got vacant in the pandemic, it is totally provisional and this situation has subsided into the new normal. This confutes the general conception of mass vacancy in rent as everything is getting normal. So, you can obviously say that investing in housing is a crack-a-jack idea. Many initiatives are being taken by the government for affordable housing and to keep housing finance and housing market functioning as it is a promising market in a developing country like Bangladesh, which is on the verge of entering middle-income country very soon.
Arun Kumar Chowdhury is General Manager of Bangladesh House Building Finance Corporation and Nayeem Shahriar is Senior Officer of Bangladesh House Building Finance Corporation.