rime Minister Shahbaz Sharif’s Apna Ghar programme has most of the ingredients of a politically attractive economic policy: cheap housing finance; government-backed risk sharing; private-sector participation; and the promise of hundreds of thousands of new homes.

But will Apna Ghar actually provide affordable homes to Pakistan’s poor and lower-middle classes? Or will a substantial part of the subsidy end up with banks, developers and landowners?

Pakistan does not have a shortage of housing finance alone; it also has a shortage of affordable housing. The government is offering up to Rs 10 million at a 5 percent mark-up for the first ten years. The financing is available for purchasing a house or a flat; purchasing a plot and constructing a house on it; or building on an already-owned plot. The government is also providing first-loss coverage to encourage banks to lend.

Conceptually, this is a significant improvement over the traditional approach under which governments attempt to build houses themselves. Here, the state is leveraging private capital rather than becoming a property developer itself. But cheap credit alone cannot solve Pakistan’s housing crisis. The poor may still be priced out.

Financial calculus

Consider the economics of the largest available loan. With 90 percent financing, Rs 10 million loan corresponds roughly to a Rs 11.1 million property, requiring the borrower to arrange around Rs 1.1 million from their own resources. For a low-income household, this is a considerable barrier. Then comes the monthly instalment. A Rs 10 million loan at 5 percent over 20 years requires a payment of roughly Rs 66,000 a month under a standard amortisation structure.

How can workers earning Rs 50,000, Rs 60,000 or even Rs 70,000 a month commit Rs 66,000 a month to housing? The answer points to the central contradiction of the scheme. The people who need the housing assistance the most may be the least capable of qualifying for the largest loans. The scheme will, therefore, end up serving the bankable lower-middle class more effectively than the poorest.

This is not a criticism of subsidising the lower-middle class. They need housing too. But policymakers should not confuse mortgage access with poverty reduction.

Economic mechanics

There is an even more uncomfortable economic problem. Give thousands of people cheap housing credit without simultaneously increaseing the supply of affordable housing and what happens? Once demand increases faster than supply, land prices rise; house prices rise. Developers increase their margins. The homeowner receives a cheaper mortgage, but the seller gets part of the benefit through a higher property price.

In other words, the government could end up subsidising landowners rather than homeowners. This has happened in different forms in housing markets around the world. Pakistan is particularly vulnerable because urban land is already one of the most speculated assets.

For Apna Ghar is to succeed, housing finance must, therefore, be accompanied by a massive expansion in the supply of serviced land and affordable apartments. Otherwise, the government will be pouring subsidised money into an already expensive property market.

The eligibility for houses up to 10 marla is generous. Big cities are running out of affordable urban land. The country needs to rethink its definition of a home. For a young family in Lahore, Karachi, Rawalpindi or Islamabad, an efficiently designed apartment near their place of work may be economically superior to a five- or ten-marla house on the urban periphery.

Maybe the government should use Apna Ghar to encourage vertical, high-density and transit-linked housing, particularly for workers. Otherwise, subsidised mortgages could simply encourage urban sprawl. That means higher transport costs, longer commuting times, greater infrastructure requirements and eventually, higher public expenditure.

Vanishing subsidy

Also, the attractive 5 percent rate is not a 20-year concession. The subsidy applies for the first ten years, after which the financing moves towards the applicable market-based structure. This creates a potentially serious problem.

A family can borrow today based on a Rs 50,000 or Rs 66,000 monthly payment. What happens ten years from now if market interest rates are substantially higher? Housing is not a short-term consumption purchase. It is a 20-year financial commitment. The government should therefore consider a gradual tapering of the subsidy rather than creating a sharp transition ten years down the road. Otherwise, today’s affordable mortgage could become tomorrow’s financial distress.

The banking part

One of the most important features of the programme is the attempt to accommodate borrowers with informal incomes. That is essential. The national economy cannot be divided neatly into people with salary slips and people without them.

Millions of shopkeepers, mechanics, transport operators, home-based workers, artisans, small manufacturers and other self-employed people earn perfectly legitimate incomes without receiving formal monthly salaries. If banks insist on conventional salary documentation, the scheme will automatically favour formal-sector employees. That will be a serious mistake.

Banks must learn to assess cash-flow capacity. Digital payments, utility bills, tax records, business transactions and other alternative indicators can help establish repayment capacity. Otherwise, the programme will reproduce the very financial exclusion it claims to address.

The government guarantee is necessary but dangerous. The first-loss guarantee is economically understandable. Banks have historically been reluctant to enter mass-market mortgage lending because they regard low-income borrowers a risk. The government guarantee reduces that risk and encourages lending.

But public guarantees create another danger: moral hazard. If banks know that taxpayers will absorb part of their losses, credit assessment could become less rigorous. The government must therefore publish the performance of the portfolio regularly.

How many loans are overdue? How many have defaulted? What is the average government subsidy per borrower? How much has the government actually paid to banks? What is the value of outstanding guarantees? Without such information, a housing subsidy can become an invisible fiscal liability.

Despite these challenges, it would be wrong to dismiss Apna Ghar. Housing can become one of Pakistan’s most powerful economic multipliers. Every construction generates demand for cement, steel, bricks, tiles, glass, paint, electrical equipment, sanitaryware, furniture, transport and labour. If 500,000 houses are actually constructed, the programme could stimulate a broad range of domestic industries.

This is where Apna Ghar could become more than a housing scheme. It could become an industrial and employment programme. But that requires the government to ensure that domestic construction inputs remain competitive. If cement, steel, electricity, transport and other inputs are heavily taxed or artificially expensive, the subsidy will simply produce expensive houses.

An equity subsidy?

The biggest obstacle for poor households is not necessarily the interest rate. It is often the initial equity contribution. A poor family may be capable of paying Rs 15,000 or Rs 20,000 a month but incapable of producing Rs 1 million in cash up-front. The government should therefore consider a more narrowly targeted equity assistance programme for poor first-time homeowners, linked perhaps to existing social-protection databases. That would be more progressive than simply increasing the interest subsidy for everyone. The objective should be to help those who are creditworthy but lack the initial capital—not to subsidise people who can already afford a home.

Measuring success

There is also a danger in celebrating applications and approvals. An application is not a house. An approved loan is not a house. Even a disbursed loan is not necessarily a completed house. The only meaningful indicator is completed, occupied and affordable housing.

The government should, therefore, publish quarterly data showing: applications, approvals, disbursements, houses completed, houses occupied and defaults. It should also disclose the average income of beneficiaries and the geographical distribution of loans. That will immediately reveal whether Apna Ghar is reaching low-income people or primarily financing the already bankable middle class.

Apna Ghar has a good economic idea at its core but an incomplete architecture. Using banks and private capital rather than asking the government to build hundreds of thousands of houses is sensible. Subsidising mortgage rates can deepen Pakistan’s almost non-existent housing-finance market. Government risk sharing can encourage banks to enter a market they have traditionally avoided. Construction can generate employment and demand across a wide range of industries.

But cheap mortgages cannot manufacture cheap land. Nor can they manufacture poor households’ missing savings. Nor can they guarantee that a borrower will remain solvent when the subsidy disappears after ten years.

If the government does not simultaneously expand the supply of affordable housing, improve urban planning, provide targeted equity support to the poor and create long-term certainty on mortgage rates, Apna Ghar risks becoming a subsidy for those who can already afford to borrow.

The overriding objective should be not to maximise the number of loans but the number of affordable homes created for households that otherwise cannot become homeowners.

There is another test.

If Rs 3.2 trillion financing is eventually mobilised, the government should be able to demonstrate precisely how much of that money went into bricks and mortar; how much into land prices; and how much ultimately benefited financial intermediaries.

The writer is a senior economic reporter for The News International.