Changing Demographic Trends and Housing Market in Pakistan

Transcription

1 Forman Journal of Economic Studies Vol. 6, 2010 (January December) pp Canging Demograpic Trends and Housing Market in Pakistan Parvez Azim and Rizwan Amad 1 Abstract Tis paper analyzes te impact of canging demograpic trends on ousing market in Pakistan. An analytic device, a pase diagram, as been used to sow te relationsip between demograpic cange and demand for ousing in Pakistan. Te caracteristics of tis paper are as follows. First, a model comprising four equations is developed to investigate te relationsip between different variables suc as ousing stock, demand for ousing, real rental price, rate of depreciation, net investment in ousing, gross investment in ousing, real price of ousing unit and growt in population. Second, set of four equations is reduced to two differential equations wic are used to solve for ouse prices (P) and number of ouses per adult in a country (). Tese two equations are also used to draw pase diagrams and to draw our conclusions. It is concluded tat ouse prices are directly related to growt rate of population and inversely related to te number of ouses per adult. In Pakistan, a rise in te growt rate of te adult (ousebuying years segment) population will increase te demand for ousing for te next four decades. Moreover, a fall in te total population growt rate could not cause downward trend in ouse prices because of canging age structure. We ave to consider te composite impact of all related factors on ouse prices wic in turn impact te supply and demand for ousing in country. I. Introduction House prices ave been one of te otly debated topics in Pakistan. Like food, ousing is a basic need and ouse rent constitutes twenty four 1 Dean, Faculty of Arts and Social Sciences, GC University, Faisalabad and Assistant Professor of Economics, Forman Cristian College (A Cartered University), Laore, respectively. rizwanamad@fccollege.edu.pk

2 Pervez and Rizwan percent of te total weigt 2 of basket of goods and services considered in calculation of te consumer price index number. For past ten years, te Housing and Construction sector as been playing an important role in economic development of Pakistan by providing substantial employment opportunities because of its forward and backward linkages in economy. Nearly 40 industries are linked wit construction activities 3 wit employment elasticity of 0.6. House prices like oter goods and services are determined by te market forces. Supply of ouses depends on ouse prices, te price of land, te cost of construction material, te cost of financing and te amount of un-depreciated ousing stock. On demand side, te demand depends on ouse prices, te level of mortgage rates, expectations of permanent income or wealt, rates of return on oter investments suc as national saving scemes and demograpic factors. Tis paper focuses mainly on a demograpic factor, i.e. cange in age structure and its impact on ousing market in Pakistan. Age distribution is an important demograpic factor tat needs to be considered wile analyzing te demand and prices of ousing in a country. A young population between 0-19 of age generates little ousing demand wile ousing demand rises from age 20 and above. Homeownersip is also expected to vary by different age brackets. To analyze te impact of canging age structure on demand for ousing in Pakistan, we use a combination of matematical model developed by Mankiw and Weil (1988) and an analytic device known as pase diagram. We organize tis paper as follows: Section II presents brief literature review about demograpic cange and its impact on ousing demand. Section III gives an overview of demograpic canges and situation of ousing market in Pakistan wile section IV analyzes te relationsip between canging age structure and its impact on ousing demand in Pakistan wit te elp of pase diagrams and model presented by Mankiw and Weil (1988). In te end, we give our conclusions in section V. II. Literature Review Mankiw and Weil (1988) are considered as te two main researcers wo initially analyzed te relationsips between demograpic canges and ousing market empirically 4. For tis purpose, tey developed a demograpic 2 GOP, GOP, a. 4 Fortin and Leclerc (2000). 50

3 Canging Demograpic Trends and Housing Market index of ousing demand and sowed ow demand for ousing canges wit age. Tey found tat age-specific demand for ousing reac its maximum by te age of 40. Tey estimated tat due to ageing of baby-boom generations, real prices of ousing in US could fall by 47% from 1990 to However, tey also concluded tat tis effect of demograpic canges on ouse prices will be counterbalanced by increase in real income. Tis interpretation of ousing demand by Mankiw and Weil (1988) was criticized by Swan (1995) wo suggested tat oter tan adult population, real income, relative prices and real interest rates are also important determinants of ousing demand wic needed to be considered in te model. A study by Tomas and Malmberg (2005) also found tat planning for residential construction sould depend upon te age structure of population. By using Swedis time series and OECD panel data, tey found a positive association between young adult population and residential construction in Sweden. Tey also found negative impact of ageing population of above 75 years and concluded tat ageing population in industrialized countries may ave negative impact on te construction industries in future. In Finland, Kuismanen et al., (1999) applied Mankiw and Weil model to analyze te role of demograpic factors on te demand for ousing. Using time series data tey concluded tat a one percent increase in demograpic demand leads to one percent growt in ousing demand. Similarly, studies by Foot and Stoffman (2000) in Canada sowed tat increase in ageing population may negatively affect te demand for ousing but increase in real income of people will likely to offset tis negative impact on ousing demand in future. Fortin and Leclerc (2000) analyzed te demograpic cange and its impact on real prices of ousing in Canada. By using data for te period of 1956 to 1997, tey developed a structural model of Canadian ousing market. Tey concluded tat oter tan real income of people, te growt rate of population between te age of 25 to 54 years ave significant impact on ousing prices. Tey also concluded tat slowing te rate of tis age group in future or ageing population may reduce te real prices of ousing in future. Contrary to above studies, Pitkin and Myers (1994) and Green and Hendersott (1996) found tat ousing demand does not fall even after te age of 40 and continues to rise to te age of

4 Pervez and Rizwan In Pakistan, only few studies related to ousing market exist but none of tem analyze te impact of age structure on demand for ousing. For example, Gaus and Pasa (1990) analyzed te trends in ousing conditions in Pakistan. By using Housing Census of 1960 and 1980, tey quantified different indicators of ousing consumption like ouseold size, real rental per capita and persons per room. Teir results sow a significant improvement in ousing conditions over te time and relatively slow growt in ousing sortages. Nazli and Malik (2003) analyzed te relationsip between poverty and inadequate ousing facilities in Pakistan. Tey concluded tat inadequate ousing facilities create sense of insecurity and disempowerment among poor people. Most of te studies cited above analyzed te impact of ageing population on te demand for ousing in advanced countries. However, in country like Pakistan were majority of population is in young and working age (15-64 years), population ageing is not a problem 5. Instead, ere is a need to analyze te impact of youtful population on demand for ousing in future. Tis paper is an effort to serve tis purpose. III. Demograpic Canges and Housing Market in Pakistan Pakistan is te sixt largest country in te world by population. Estimated population of Pakistan in year , was 170 million people wit an annual growt rate of 1.8 percent. It is not te population size and te growt rate only tat matters but te age structure of population also plays an important role in decision making of individual s economic life 6. Pakistan is now going troug te stage of demograpic transition in wic generations of cildren wo were born in te period of ig fertility are entering into te working age, tis will increase te labor supply in future 7. Moreover, as fertility rate is now falling, female labor force participation rate will also rise. A direct impact of tis cange will be decrease in young and old aged dependency ratios and increase in ratio of working age to dependant population (table 1). 5 See, Amad and Azim (2008). 6 See, Lee et al. (2006). 7 See, Nayab (2008). 52

5 Canging Demograpic Trends and Housing Market Table: 1. Demograpic Indicators of Pakistan, Years Population growt rate (%) Aging index Broad age groups (%) and above Median age (years) Dependency ratio Total Yout Old age Potential support ratio Ratio of working to dependant population Source: United Nations, 2002 and autor s own calculations. Population pyramids of Pakistan (figure 1) also indicate canging age structure in Pakistan. Housing buying segment of population (20 years and above) as increased from 47 percent to 50 percent since 1981 and is expected to increase up to 72 percent in year Since te sare of adult population (ouse-buying years) is rising tere would be a rise in te demand for ousing wic would exert an upward pressure on ouse prices in te next four decades. Housing statistics of Pakistan sows te sortage of ouses in te country. According to te population census 1998, tere were 19.3 million ousing units wit an average ouseold size of 6.6 and 3.3 persons per room. Currently, incremental demand for ousing is 570,000 units per annum but only 300,000 units are being built, so every year tere is a sortage of 270,000 units per annum (table 2). Due to tis sortage and rising demand, ouse rent as increased by percent since te year and is expected to increase furter. In order to meet te ousing sortfall and address te backlog of 8 million ousing units, te ousing supply will ave to be increased to 970,000 units annually for next 20 years 8. 8 GOP,

6 Pervez and Rizwan Figure: 1. Population Pyramids of Pakistan Age Year Female Male Larger sare of Younger Population Percentage of Total Population Year Percentage of Total Population Year 2050 Larger Proportion of Working Age Population Percentage of Total Population Source: U.S Bureau of Census, International Data Base. 54

7 Canging Demograpic Trends and Housing Market Table: 2. Housing Statistics in Pakistan Total population 170 Million ( ) Urban population 38 % of total population Total ousing units 19.3 million Owned ousing units 85.9 % Houseold size 6.5 Room density 6.7 persons per room Demand for ousing 570,000 units per annum Supply of ousing 300,000 units per annum Net sortfall of ousing 270,000 units per annum Total ousing backlog 8 million units Housing finance, as percentage of GDP 0.7% Source: GOP b and SBP, IV. Te Model 9 Te main purpose of tis study is to analyze te impact of increase in te sare of population (ouse buying years) on ousing market in te country. For tis purpose we use te model developed by Mankiw and Wiel, 1988, and an analytic device known as Pase diagrams to establis te relationsip between demograpic cange, ousing demand and prices. Tis forward-looking model 9 is presented in te following set of four equations. Hd = f(r) N.(i) R R= R () = R >0.. (ii) R( ) = rp P (iii) g H + dh = g( P) N = g > 0.. (iv) P Were: H = stock of ousing Hd = demand for ousing R = real rental price 9 Tis model draws eavily on Sone, (2002) and Mankiw and Weil, (1988). 55

8 Pervez and Rizwan N = adult population = N H = number of ouses per adult (20 years and above) of te population = growt in number of ouses per adult in population P = real price of a standardized ousing unit (value of te ouse) P = growt in ouse prices rp= operating cost of owing a ome d= rate of depreciation H = net investment in ousing H +dh = gross investment in ousing N n= N = rate of growt in population dh Differentiation of equation (i) wit respect to N gives us d = f ( R) > 0 dn wic implies tat demand for ousing will increase wit a rise in adult population. Differentiation ( ) of (iv) wit respect to N gives us d H + dh = g ( P ) > dn 0 wic implies tat gross investment in ousing sector will increase wit a rise in adult population. Differentiation of = N H wit respect to time gives us NH HN H H N d H = = 2 were = and te like. = N N N N dt N Substituting te respective values from above gives us g( P) N dh = n N = g( P) ( d + n) n Te model is reduces to te following two differential equation wic determine te motion of te model. P = rp R( ) = g( P) ( d + n) 56

9 Canging Demograpic Trends and Housing Market Tese two equations give us a solution for P and. A steady or stationary state occurs were te values of te variables remain constant over time. (, P at te intersection of P = 0 and = 0 lines). Tese are determined by setting P =0 and = 0. In te price equation, in a steady state P =0 wic yields rp-r () = 0 rp = R() R( ) P =. (v) r Differentiating equation (v) wit respect to gives us dr dp ( ) = d R = < 0 since R ( ) < 0 implying real rental price and number d r r of ouses per adult vary inversely. Hence te price stability condition gives rise to a negatively sloping line in te pase plane as sown in figure 2. To te left and below te line P R( ) =0 te condition P > prevails, wic implies tat P > 0, and so te r ouse prices are rising sown by upward directing arrows. Te converse olds R( ) to te rigt and above te line were P < prevails, wic implies tat r P < 0, and so te ouse prices are falling sown by downward directing arrows in figure 2. In te second differential equation = g( P) ( d + n), in equilibrium tere is no cange in te number of ouses per adult of te population wic is sown by = 0. Hence, ( P) = ( d n) g + (vi) Differentiating (vi) wit respect to yields dp g ( P) = d + n d dp d + n dg = > 0 since = g ( P) > 0 implying tat gross investment in d g ( P) dp ousing rises wit rise in ouse prices. 57

10 Pervez and Rizwan Figure: 2. P / dp / d = R < 0, P < 0 / dp / dp => r 0, P > 0 0 Relationsip between P and wit respect to growt in ouse prices P = 0 Tis stability condition gives us a positively sloping line in te pase plane as sown in figure 3. Above and to te left of te stability condition > 0 and so is rising sown by rigt ward pointing arrows, and te converse olds to te rigt and below te line were is falling sown by leftward pointing arrows in figure 3. Now differentiation of (vi) wit respect to n and d gives us: dp ( d + 1) = > 0 Implies tat price of ousing varies directly wit n dn g ( P) (population growt rate) dp ( n + 1) = > 0 Implies tat price of ousing varies directly wit d (rate of dd g ( P) depreciation of ouse). Superimposition of figure 2 on figure 3 gives us figure 4. Pase diagram depicted in figure 4 sows te vector of forces in te four quadrants I, II, III and IV. Any point in sectors I and III, oter tan te equilibrium point will move away from te equilibrium because tey will be on unstable arm 58

11 Canging Demograpic Trends and Housing Market were resultant of two vectors will take tem away from te equilibrium as sown in figure 4. Point A is called a saddle point lying on te stable arm Z 1 Z. 1 Figure: 3. P = 0 d / dp = g ( P) > 0 / > 0 ( d + ) < 0 d / d= n < 0 0 Relationsip between P and wit respect to growt in ouse prices A market wic starts out of equilibrium, suc as point B will initially sow a rapid rise in ouse prices (B to C) to reac te stable arm at C and ten eventually will move down to te equilibrium point A. At points suc as L and K, te pats diverge from te steady state wile at points suc as M and N, tey converge to te steady state. Now suppose sare of adult population (ouse buying segment) increases as sown by a rise in te sift parameter n causing an anticlockwise tilt in te ousing line 1 figure 5. Tis new line 2 d because = ( d + n) < 0 = 0. Tis new ousing line is sown by = 0 in = 0 is steeper tan te old line = 0, tus wen n (iger growt rate of population) d rises te slope of te ousing line rises and vice versa

12 Pervez and Rizwan Figure: 4 P I Unstable arm =0 Z 1 M C A II IV B. L N / Z 1 Stable arm III P =0 0 Pase Diagram sowing saddle point stability Te rise in n will raise te absolute slope (d+n). Consequently, te new ousing line 2 =0 will be to te left of te old ousing line 1 =0. Now / tere will be anoter saddle point D and a new saddle pat Z 2 Z 2 as sown in Figure 5. It is evident tat as ouse buying segment of population (N) rises number of ouses per adult () will fall. Tis will increase investment in ousing sector wic will increase >0 i.e. a fall in will increase d ( 0 d < ). Similar will be te situation of Pakistan, te overall population growt rate is projected to fall from 2.9 percent in 1981 to 0.7 percent in 2050, but te sare of adult population (ouse buying segment) is projected to rise from 47 to 72 per cent during te same period wit a growt rate of percent per year. To see te impact of tis cange in population growt on ouse prices P and ousing per adult, wit market aving perfect foresigt, tere would be upward surge in P sown by moving from A to B in figure 5. Tis 60

13 Canging Demograpic Trends and Housing Market movement in te system is called te announcement effect of rate of growt in adult population. Tere will be no rise in ousing demand from A to B because te babies ave not become adult yet. Te system will move in te nort easterly direction wic is te resultant of te two forces, one pulling in te east ( > 0 ) and te oter in te nort ( P > 0 ) along a pat like BC. Wen te adult population increases and becomes te part of te ousing / market, ten te market will be on te new saddle pat sown by Z 2 Z 2 in figure 5. Now te system will operate on tis new saddle pat towards point D. It is to be noted tat te system will reac from C to D under te assumption of perfect foresigt. If tis assumption does not old, te point D will not necessarily be acieved. P Figure: 5. Z 2 = 0 Z 1 = 0 D B A Due to rise in n by 2.04 per cent per year between 2007 and 2050 C P = 0 Z / 1 =0 1 = 0 Z / 0 2 = 0 Impact of anticipated increase in adult population on P and In coming alf century, sare of adult population (ouse buying segment) will increase at annual growt rate of percent. Tis rising trend in ouse-buying segment of te population will definitely exert an upward pressure on ouse prices and will swing te 1 = 0 line counterclockwise and will become 0 as sown in figure 5, sowing a rise 2 = 61

14 Pervez and Rizwan in demand for ousing and ouse prices. Given te price elasticity of demand for ousing 0.5 (as used by Mankiw and Weil) and assuming tat te growt of ouse demand would be equal to te rate of growt of ouse-buying segment of population, wic appens to be 2.046, te ouse prices would rise by 4.09 percent annually between 2007 and 2050 due to canging demograpic trend in Pakistan. It is trivial to sow a rise in te price of a certain ouse during 43 years (2007 to 2050). If its price in 2007 was say rupees 5 million and te growt rate of ouse prices is 4.09, te same ouse would cost rupees 28 million in 2050, Te initial price is multiplied by a factor 10 of Te actual rise in te prices in fact could be more because of oter inflationary factors suc as rising trend in te cost of construction materials and labor. V. Conclusions Experience of advanced countries as sown te relationsip between ousing market and age structure of population. Pakistan is also going troug te pase of demograpic transition wen generations of baby boom ave been entering into te pase of teir working lives. In general, we can make a reliable prediction tat tis trend of youtful population will increase te demand for ousing in te country as young and married people are usually keener to live separately and independently of teir joint family Terefore, it is expected tat ouse prices will tend to rise over te next four decades, after 2050, tey migt flatten out over long periods of time because of a negative demand sock like te setting in of aging population and exiting of youtful population. Besides, te large cities will be magnets for rural to urban migration tat will increase demand for ousing in big cities. It warrants government intervention in ousing sector to provide affordable ousing by keeping in view te canging demograpic factors in Pakistan. T 10 P 1 G 1 were G (average annual growt rate in %) = 4.09, = 100 P0 T (time period in years) = 43, P o = 5 million (price in year 2007), P 1 = 28 million (price in year 2050). 11 Unlike Western world, joint family system is quite strong especially in rural areas of Pakistan but in recent past it as been observed tat young people prefer to live independently after marriage. 62

15 Canging Demograpic Trends and Housing Market References Amad, R. & Parvez, A. (2008). Socio-economic implications of canging demograpic trends in Pakistan. GCU Economic Journal, Vol. XLI(1), pp Foot, K. D. & Stoffman, D. (2000). Boom, bust and eco: Profiting from te demograpic sift in 21 st Century. Stoddart Publising. Fortin, M. & Leclerc, A. (2000). Demograpic canges and real ousing prices in Canada. Caiers de recerce Department of Economics, Faculty of administration, University of Serbrooke. Gaus, A. & Hafiz A. P. (1990). Magnitude of te ousing sortage in Pakistan. Te Pakistan Development Review. Vol. 29(2), pp Green & Hendersott (1996). Age, ousing demand and real ouse prices. Journal of Regional Science and Urban Economics, Vol. 26, pp GOP. ( ). Family Budget Survey. Federal Bureau of Statistics, Statistics Division, Islamabad. ( ). Pakistan Economic Survey. Economic Advisor s Wing, Finance Division, Islamabad. ( a). Pakistan Economic Survey. Economic Advisor s Wing, Finance Division, Islamabad. ( b). Pakistan Social and Living Standard Measurement Survey. Federal Bureau of Statistics, Statistics Division, Islamabad. Kuismanen, M., Seppo, L. & Heikki A. L. (1999). Demograpic factors and te demand for ousing in te Helsinki Metropolitan Area. Discussion Papers 191, Government Institute for Economic Researc Finland (VATT). Lee, R. S. Hyope, L. & Mason, A. (2006). Carting te economic life cycle. NBER working Paper No Mankiw, N. G. & Weil, D. N. (1988). Te baby boom, te baby bust, and te ousing market. NBER Working Paper Series. Working Paper No Nayab, D. (2008). Demograpic dividend or demograpic treat in Pakistan. Te Pakistan Development Review, Vol. 47(1), pp Nazli, H. & Soail, J. M. (2003). Housing: Opportunity, security, and empowerment for te poor. Te Pakistan Development Review, Vol. 42 (4), pp

16 Pervez and Rizwan Pitkin, J. R. & Myers, D. (1994). Te specification of demograpic effects on ousing demand: Avoiding te age-coort fallacy. Journal of Housing Economics, Vol. 3(3), pp Sone, R. (2002). Economic dynamics: Pase diagrams and teir economic application. Second Edition. Cambridge University Press. SBP. ( ). A brief on ousing finance in Pakistan. Available at: ttp:// Swan, C. (1995). Demograpy and te demand for ousing: A reinterpretation of te Mankiw-Weil demand variable. Regional Science and Urban Economics, Vol. 25(1), pp Tomas, L. & Malmberg, B. (2005). Demograpy and ousing demand - Wat can we learn from residential construction data? Arbetsrapport 2005:20, Institute for Futures Studies. U.S. Census Bureau, Population Division, International Data Base. On line data available at: ttp:// United Nations. (2002). World Population Ageing: Department of economics and social affairs, Population Division, New York. 64