Effect of Dollar on Property Market of Pakistan

Ever since the start of 2019, the devaluation of Pakistani rupee compared to dollar has continuously affected various business markets of Pakistan’s economy. With the ongoing trend, it seems like the increase in dollar rate will remain unstoppable for now but will this sudden shift also create its impact on the real estate sector of Pakistan?

Foreign exchange rates normally don’t have much to do with real estate for as long as the hunting for buyers limit till the locals but when foreign investments have to play an integral role in order to boost the real estate, then in an underdeveloped country like Pakistan, securing the investments can become a bit risky.

With Pakistan already facing a record breaking hyperinflation, due to which the buying power is dropping down for property, the real estate businessmen have started to jump for the option of seeking foreign investments with an aim to expand and improve their market.

 The reason for devaluation might be political, economic or ever growing corruption but apart from directly affecting the currency value, the consequences of devaluation in an unstable economy extend to creating negative investment reputation especially in a sector like real estate.

Whenever the real estate investor eyes on buying any property, two factors are often kept in mind: return on investment (ROI) due to property value appreciation upon sale, and rents received during ownership. Now when the rate of local currency compared to dollar drops, the ROI on property values significantly falls down as well. To explain this better, an investor receiving a certain percentage as return on investment on the sale of property will have to subtract the decline in the value of the dollar (plus add in inflation) to determine the actual realized gain or loss.

On the other hand for rental management, when the dollar strengthens, the operating expenses drop and anything you pay for homeowner association fees, utilities, and taxes will cost less in terms of dollars. But, as it weakens, you start to get a pay cut.

One of the most recent growing concerns shared by the recently is of the buyer’s attitude changing due to devaluation.  People with money seem to be more interested towards investing in assets like gold, or foreign exchange reserves, owing to improve the liquidity of their investment. Devaluation makes dollar a much attractive asset to invest in which not only yields quick higher returns but is also very secure as compared to investing your money in slow moving assets like property where the money trail also becomes hard to manage.

To conclude the debate, the negative effects of devaluation of currency can be seen clearly on Pakistan real estate. Not only the prevailing prices of property in the market are falling down but the buying activity hasn’t also increased simultaneously from either buyers or investors.

However, in order to make the turnover more positive, the Government and State bank of Pakistan will have to play to major role by regulating their policies to bring stability In Pakistani rupee. They should design and implement strict plans while also providing active monitory policy to limit inflation and devaluation from Pakistan. The damage is massive right from the start of this year but let’s hope things swing around to normal and extraneous variables finally stop to impact post elections.