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Some reasons behind Pakistan property boom and crash of mid 2000s

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Some reasons behind Pakistan property boom and crash of mid 2000s

Postby admin » Fri Mar 20, 2015 5:41 am

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After the recent price hikes seen in real estate market, many investors are worried about another property bubble. The famous property bubble bust of late 2000s is a recent memory, which has many success and doom stories. Many people find the present boom rather unstable and relate it with the property boom and crash of mid 2000s. It is therefore important to look at the reasons why Pakistan real estate market went markedly up in early 2000s and later crashed.

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Property boom in 2003-2005

Property boom of 2003-2005 occurred due to high property demand. To understand the real estate market and the ups and downs it regularly faces, we should know the fundamental connection between demand and supply. In real estate market, just like all other sectors, when demand is high and supply is low, prices generally go up and when demand is low and supply is high, prices fall. In other words, when number of property buyers exceeds the number of sellers, property rates increases and vice versa. Following are some of the reasons that helped create huge demand of property in Pakistan during and after 2003.

9/11 event

One reason of property boom of 2003-2005 was the unfortunate incidence of 9/11. Pakistanis living in the USA had to face discrimination after 9/11 and they were forced to move back to Pakistan with their wealth. These Pakistanis bought houses in posh areas of Lahore, Karachi and Islamabad and invested in property sector creating a sudden rise in demand and consequently the boom of 2003-2005.

Record low bank interest rate

Another factor behind the property boom of 2003-2005 was the record low bank interest rate. In the past, average interest rate offered by State bank of Pakistan was 12%. In 2003, the interest rate was lowered to 7.5%. Due to sudden decrease in interest rate, people who had deposited their money in banks saw their profit shrinking; they withdrew money and invested the amount in booming property market. This also increased demand for property and pushed the rates up.

Booming economy & direct foreign investment

In 2003, Pakistan formed a collation with USA in War Against Terrorism. Due to this collation, Pakistan received support funds that stabilized the economy and strengthened the rupee. Pakistan also got a lot of direct foreign investment. Large portion of this money eventually went to the housing sector which further supported the property boom.

Property crash of 2007

Pakistan property market crashed shorty after its boom. According to the experts, following were some of the reasons why real estate market of the country went down:

Recovery of the US economy

The US Government controlled communal violence within its states and started strengthening its economy. By 2005, economy of the US had improved and dollar had gained some strength. Seeing the US economy revive and racial violence going down, US based Pakistanis decided to sell their property and head back to the States. As there were more sellers in the market than buyers, the market crashed.

Sudden rise in interest rate

Interest rates offered by banks were increased from 7.26% in 2004 to 11.77% in 2007. To get high profits from fixed accounts, people chose to deposit money in bank accounts by selling their properties. The result of all of this was the crashed property market.

New housing societies

Due to high returns in property sector, many investors started developing their own housing societies. Same trend was observed among the small investors who joined the league to get hefty returns. With increased supply, we mostly see the property markets crash and this is exactly what happened in 2007 onwards.

Conclusion

When we look at the present state of affairs in Pakistan real estate sector, many temporary triggers such as sudden investment influx, sharp improvement in economy and profit taking trends are absent in the market right now. All of this points towards the fact that the prevailing property boom is far from experiencing a bubble bust.

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