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Fri. December 13, 2024
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Around the World, Across the Political Spectrum

Real Estate as a Major Contributor in the Economic Downfall of Pakistan

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Pakistan's currency is depreciating, inflation is growing, the trade deficit is widening, foreign investment is declining, and the country's foreign exchange reserves are decreasing. Numerous causes, including the reduction in international demand for Pakistani exports, the increase in commodity prices, political unrest and security worries are to be blamed for this situation.  By restarting its IMF loan programme, reducing spending, and reducing the need for imports, Pakistan is attempting to prevent default. The nation is also experiencing political unrest as a result of the vote of no confidence that forced former Prime Minister Imran Khan from office, accusations of foreign and judicial influence, and a significant party receiving foreign funding.

Since its inception, Pakistan is facing many economic crises and the above-mentioned conditions are some of them contributing in doing so. However, there is another factor that has contributed a lot i-e. people do not know where to invest and vice versa. There are so many local investors with huge resources but they are not investing in any practical sector. Mainly, those investors prefer real estate as the main investment sector. According to many economists, real estate is a major contributor to the economic crisis in Pakistan, causing detrimental effects on various aspects of the economy. There are many terminologies and concepts that are related to the real estate, some of them will be discussed here. The first one is real estate bubble.

 A real estate bubble is characterised by an uncontrollable and rapid rise in property values that is unrelated to the properties' true value. It is characterised by a speculative frenzy as investors and homebuyers rush to invest in real estate as they anticipate additional price appreciation, artificially driving up demand. Low interest rates, easy loan access, speculation, and investor confidence all contribute to the boom. However, economic fundamentals like income growth, rental yield, or supply and demand dynamics do not justify the higher prices. The bubble eventually pops, causing a significant drop in real estate prices, financial instability, and possibly a wider economic crisis.

Real estate speculation fuels market turbulence and price instability. As a result, investments are diverted away from the economy's productive sectors, distorting how resources are allocated. Speculative activities cause capital to be misallocated, which impedes the development of the industrial sector, the creation of new jobs, and general economic stability. Additionally, when a bubble collapses, investors frequently suffer substantial financial losses, which has an impact on the overall economy.

There is one current example that recently happened in Pakistan related to real estate market. The price of the most expensive blue area land ever auctioned in Islamabad was about 8.54 billion. Eight commercial plots were auctioned off on the first day of the CDA’s three-day plot sale, and bidders received compensation totalling more than 22.11 billion. The data shows that the investors have invested a lot of amounts in commercial plots, though they will earn more than that they have invested but there were more options opened to them as well.

They had the opportunity to invest this money in industrial sectors. They can even open sugar mills, textile industry or any other sort of steel mill but they did the opposite. This is how investors are just focusing on their own benefit instead of thinking about their state. This is how real estate diverts investments away from the productive sectors in Pakistan by negatively impacting the overall economy of Pakistan. When it comes to real estate, the term "misallocated resources" refers to the redirection of money, labour, and other resources away from economically productive areas like manufacturing, industrial development, and job creation. This incorrect allocation may have the following unfavourable effects:

  1. Lack of investment in profitable industries: When money is diverted excessively into the real estate industry, less money is available for investment in other industries. As a result, funding for innovations, infrastructure improvements, technical developments, and industrial development is lacking. As a result, certain sectors of the economy that have the potential to greatly boost job creation and economic growth may continue to be underdeveloped or stagnant.
  2. Reduced industrial competitiveness: When resources are misallocated, the economy can become skewed and the real estate industry can grow out of proportion to other sectors. Due to their difficulty in obtaining sufficient resources and investments, industries struggle to be competitive due to this imbalance. Industries may have trouble growing, implementing new technology, and competing globally, which limits their ability to develop and create jobs.
  3. Uneven distribution of labour across industries occurs when resources are concentrated in the real estate sector. This can lead to a lack of qualified personnel in industries including manufacturing, technology, and services. As a result, businesses struggle to fill open positions with suitable workers, which restricts their ability to grow, innovate, and produce as much as possible. Due to this mismatch in the labour market, certain industries may experience unemployment or underemployment, while occupations involving real estate may become overrepresented.
  4. An economy is more vulnerable to shocks and downturns when it depends significantly on the real estate sector for economic growth. The economy suffers a serious setback when a real estate bubble bursts or when property values fall. The misallocation of resources makes the crisis worse since it causes huge losses in the real estate-dependent industries, which lead to job losses, company closures, and financial instability.
  5. Misallocation of funds towards real estate exacerbates wealth disparity and has negative societal repercussions. Property owners profit disproportionately from rising property values, expanding the wealth gap between them and the broader populace. Given that most people struggle to afford housing and have limited access to wealth-accumulating opportunities, this might cause social discontent.

In conclusion, improper resource allocation to the real estate sector impedes the growth of industry, hinders the creation of jobs, and causes economic imbalances. For sustained economic growth, competitiveness, and the equitable distribution of wealth and opportunity, it is essential to diversify investments and encourage a balanced allocation of resources across all economic sectors.

 Aliza Saeed is a student at National Defence University Islamabad.

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