According to the new World Bank study, most Pakistani households’ wealth comprises residential buildings. The study reports that the net worth of a household increases with age – and by the age of 60 to 65, almost 80% of Pakistanis accumulate their wealth in the form of residential properties. This percentage of residential wealth for urban households is 70.8% compared to 56.6% for rural households on average, from 2001 to 2018.
The study also outlines the average Pakistani household net worth growth between ages 25 and 65. It claims that the asset accumulation in the early years of the life cycle is slower but it picks up momentum between the ages of 40 to 65.
In most cases, active saving during the ages of 40 to 65 plays a significant part. The growth in household income tends to outpace household consumption during this time and the rate of saving increases by 20 percentage points.
The bulk of these savings consisted of residential buildings, whereas land, durables, businesses and other financial assets are stagnant over the life cycle.
The World Bank released the study “Life Cycle Savings in a High-Informality Setting – Evidence from Pakistan” earlier this week where it is also suggested that various factors such as population ageing, weakening family and village risk-sharing networks, and low formal pension coverage can impact the elderly’s consumption, making it a major challenge for the country in future.
The primary focus of the study is on wealth accumulation during the life cycle and why most Pakistani households prefer real estate among all available investment options.
Real Estate: A Safe Investment Option
According to the global property guide, the price of houses has increased by 218.65% in the last 10 years, which shows the increase in the value of a property over time. If inflation is taken into account for the last 10 years, property prices have increased by 62.14%.
It is pertinent to note that the increase in the value of the real estate is gradual and you may not see a significant increase in just one or two years. However, the price trends of houses for the last decade make it evident that real estate delivers positive returns compared to other assets over the long term.
All the data indicates non-volatility in the real estate market and how it remains unaffected from the rising inflation compared to other available investment options.
Furthermore, the data suggest that people tend to invest much more in residential properties compared to commercial properties. This is due to the risk involved and the higher minimum capital required to invest in commercial properties. Still, commercial properties are a promising investment option for people looking to invest in real estate.
If you’re looking to get started in investing, here are a few key reasons why real estate is an excellent investment option to add to your portfolio.
Appreciation of Property
As mentioned earlier, the value of real estate tends to increase over time, which can help gain profits by selling it for a higher price. Most people use this buy-and-hold strategy to get maximum profit but there are other strategies like house flipping that can be used to get better returns before appreciation occurs. In house flipping, you buy an undervalued house, renovate it, and then sell it for a profit.
In the last few years, property prices have increased due to a limited supply of land and a continuous increase in demand in the real estate market. This imbalance in the real estate market has caused a massive appreciation in the properties’ value.
Retirement Savings Plan
It is important to remember that real estate is not a liquid asset; you’re investing in a property for the long term. This makes it an excellent retirement plan as you can sell the property near retirement and use the profits from the sale to cover all your expenses.
The biggest advantage of investing in real estate is it can provide an additional source of income. For instance, you can invest in rental properties that allow you to earn monthly income.
Most investors prefer real estate to expand their portfolio as it has a low and negative correlation with other asset classes. It lowers volatility in the portfolio and investors get a much better return in the long run. So, if you’re looking to diversify your portfolio, real estate is the most suitable option for you.
As the data suggest, inflation has no significant effect on real estate. In a high inflationary environment, one requires assets that move in the opposite direction to the market, and there isn’t any better option than real estate. The price of a property tends to remain on the higher side, making it the best hedge against rising inflation.
The Future of Real Estate
Despite all these benefits, most people are reluctant to invest in real estate due to scams and a lack of regulation in the sector. Recently, the government has also imposed new taxes on the real estate sector, which will further impact its growth. According to an estimate from the World Bank, real estate contributes 60 to 70 per cent of the country’s wealth, which is approximately equal to USD 300 to 400 billion. Moreover, it is the second largest employment generator in the country.
Imposing more taxes and a lack of regulation in the industry (that plays an important role in the economy) will further impact growth in this sector. The government must introduce a more transparent and centralised system that will attract more people, especially overseas Pakistanis, to invest in real estate. The government should create a regulatory authority that defines the rules for property acquisition and approves all upcoming real estate projects in the country. Hence, the government should revise the policy for the real estate sector.
For more information about real estate in Pakistan, visit Graana’s blog.