A real estate bubble occurs periodically in local or global real estate markets, typically following a land boom. A land boom is the rapid increase in the market price of real property such as housing until they reach unsustainable levels and then decline. Bubbles in housing markets are more critical than stock market bubbles.
The property bubble occurs due to high speculation which artificially increases the property demand. As there is no real demand, every property bubble bursts and we see massive price crash. In 2005, Pakistan real estate bubble collapsed and people lost millions of rupees. The property market took several years to recover the prices. Once again we are in trouble but most important thing is to know how property bubble will burst in Pakistan.
Current property price trends
Pakistan real estate sector was in bubble phase since November 2016, when property tax amnesty scheme was introduced. But now due to massive crack down on black money, this bubble has started to collapse. Asking price has decreased by 20-25%. It’s just the start of a lengthy process which will take many months to complete.
Why property prices are falling in Pakistan?
Investment has huge impact on property price as it increases the volume of transactions. When transactions are high, property prices rise. Ironically, Pakistan property market was alcoholic of black money and foreign remittances. But now black money has been blocked by SC and remittances are decreasing too. Due to less investment, property prices are falling.
The market behavior
The only buyers at the moment are the honest tax payers who want to buy a place for living as they are fed up of paying rents. The genuine buyers have low purchasing power, so only small & cheap properties are changing hands. Property search and queries are still strong, but buyers are waiting for the big bargains.
The current property prices are not sustainable as investment in drying up. Property price crash is written in the sky. The only question is what course this crash will take. There are three possible scenarios; hard crash, soft crash and long stagnation. We will see 35-50% property price fall followed by long stagnation. But this time crash will be bigger than that of 2005.
Areas will be hit hard?
Property price fall will not be same across Pakistan. Some areas will be hit hard where others will see only price stagnation. Areas which are less inhabited and have high speculation will be hit hard. Areas with moderate population and some speculation will see moderate price fall. On the other hand, areas with high density and low speculation will see only price stagnation.
Luxury versus affordable properties
Luxury properties are always the first victims of property price crash, whereas cheap properties only see price stagnation. This is because luxury properties are the main target of black money people and cheap properties are bought by the genuine buyers. Houses of worth up to 10 million PKR will see price stagnation but high end properties will see hard price crash.
Losers and winners
Every real estate crash has losers and winners. The people who bought properties at peak price in early 2017 will be the losers. This is because they bought properties at high rates and after crash property price will be less. On the other hand people who will buy the properties after price crash will be the winners, as at that time prices will be very affordable.
Time it will take to bottom out property prices
In every property crash some people make a killing due to wise decision and right timing. The most important thing is to guess the time when property prices will be bottomed out. As SC has opened the mega corruption cases and investment is drying up, so it will just take 4-6 months for crash to complete and further 4-6 months to bottom out the prices; the right time to start buying again.