HOUSING DEMAND IN URBAN AREAS OF PAKISTAN By Ayaz Ahmed A Dissertation Submitted in Partial Fulfillment of the Requirement for the Degree of Doctor of Philosophy in Economics Department of Economics PAKISTAN INSTITUTE OF DEVELOPMENT ECONOMICS, ISLAMABAD 2015 i ACKNOWLWDEGMENT I am thankful to Almighty Allah the omnipotent and the most Merciful, who enabled me to complete this dissertation. It is great pleasure for me to dedicate this dissertation to my respected and fatherly caring sister Miss Mussarat Almas late who looked after me after my father‟s death when I was only five years old. She is very affectionate to me and till her death I never felt that my father was no long with us. However, I missed my sister a lot. I have no words to overstate my gratitude to my both PhD supervisors, Dr. Rehana Siddiqui and Dr. Nasir Iqbal. Without their inspirational guidance, their enthusiasm, their encouragements, their thought provoking comments, I could never finish my doctoral work. For me, they are not only my teachers, but also lifetime mentors and advisors. I, once again, express my heartfelt gratitude for them and pray for their health and services for the nation as well as for the noble profession. I would take this opportunity for thanking all my teachers from my school onwards, especially, Dr. Muslehuddin, Dr. Ather Maqsood Ahmed, Dr. Rehana Siddiqui, Dr. Fazal Hussain, Dr. Ejaz Ghani, Dr. Faiz Biliquees, Dr. Eatzaz Ahmed, Dr. Abdul Qayyum, Dr. Najam us Saqib, Dr. Muhammad Iqbal and other faculty of PIDE that enhance my understanding of Economics. I am deeply thankful to Mr. Masood Ashfaq Ahmed (Computer Chief, PIDE) and Dr. Abdul Sattar (Deputy Director, PBS) they provide me data related to my dissertation on data set of PSLM 2004-05 and 2010-11. I ii am also extremely thankful to Mr. Muhammad Siddiq Qureshi for his excellent formatting of this dissertation. I thank my seniors, fellow students and friends at PIDE and elsewhere; Dr Asad Zaman, Dr G.M Arif, Dr. Usman Mustafa, Dr. Muhammad Arshad Khan, Dr. Attiya Javed, Dr. Mahmood Khalid, Dr. Akthar Hussain Shah, Dr. Imtiaz Ahmed, Dr. Idrees Khawaja, Affia Malik, Samina Nazli, Henna Ahsan, Lubna Hassan, Dr. Tariq Mehmood, M. Ali Qasim, Mr. Muhammad Ramzan, Dr. Muhammad Idrees, Dr. Abdul Jalil, Dr. Wasim Shahid Malik, and all others whom I cannot name here due to space limitation for their encouragements, thought provoking discussions, help and support. Furthermore, I express my humble gratitude to my father, mother, father in law and mother in law for their prayers and holly wishes for me. At the end, I can never forget my wife Samina who provides me tea/coffee in midnight when I was busy in study. I also thankful to her and Sons Awais, Tayyab and Faheem for their co-operation and patience during the period of writing this dissertation. Last but not least I am extremely thankful to my all brothers and sisters who always pray for my success to writing down this dissertation. Ayaz Ahmed iii Dedicated to my late sister Miss Mussarat Almas iv Contents Abstract ................................................................................................................................ x CHAPTER 1 INTRODUCTION .................................................................................................1 1.1 Background ............................................................................................................................ 1 1.2 Housing in Pakistan: Motivation ........................................................................................... 2 1.3 Objectives of the dissertation ................................................................................................. 5 1.4 Significance of the study ........................................................................................................ 6 1.5 Methodology .......................................................................................................................... 6 1.6 Empirical Findings ................................................................................................................. 7 1.7 Organization of the Thesis ..................................................................................................... 8 CHAPTER 2 LITERATURE REVIEW ...........................................................................................9 2.1 Introduction ............................................................................................................................ 9 2.2 Theoretical Literature: Demand for Housing ......................................................................... 9 2.2.1 Economic Factors .......................................................................................................... 10 2.2.2Demographic Factors ..................................................................................................... 12 2.2.3Social Factor .................................................................................................................. 14 2.2.4 Household Composition ................................................................................................ 15 2.2.5 Migration....................................................................................................................... 16 2.3 Empirical Literature ............................................................................................................. 17 2.4 Home Ownership ................................................................................................................. 20 2.4.1 Evidence from Developed countries ............................................................................. 20 2.4.2 Evidence from the Developing Countries ..................................................................... 22 2.4.3 Conclusion .................................................................................................................... 23 2.5 Rented Housing .................................................................................................................... 24 2.5.1 Evidence from the Developed Countries ...................................................................... 24 2.5.2 Evidence from the Developing Countries ..................................................................... 25 2.5.3 Conclusion ........................................................................................................................ 25 2.6 Remittances and Housing Demand ...................................................................................... 30 2.7 Conclusion ........................................................................................................................... 32 CHAPTER 3 STYLIZED FACTS ABOUT HOUSING IN PAKISTAN ................................................ 34 3.1 Introduction .......................................................................................................................... 34 v 3.2The State of Housing in Pakistan .......................................................................................... 35 3.2.1. Housing Stock .............................................................................................................. 35 3.2.2. Nature of Housing Units .............................................................................................. 38 3.2.3. Congestion ................................................................................................................... 46 3.3. National Housing Policy (NHP) ......................................................................................... 47 3.4. Housing Finance in Pakistan ............................................................................................... 49 3.5. Remittances and Housing Demand ..................................................................................... 51 3.5.1. Remittances: Trend Analysis ....................................................................................... 53 3.5.2. Remittances and Housing demand Nexus in Pakistan ................................................. 54 3.6. Conclusion .......................................................................................................................... 57 CHAPTER 4 MODELING FRAMEWORK, DATA AND ESTIMATION METHODLOGY .. 58 4.1. Introduction ......................................................................................................................... 58 4.2.2. Durability ..................................................................................................................... 61 4.2.3. Heterogeneity of Housing ............................................................................................ 63 4.2.4. Locational Factors ........................................................................................................ 63 4.3. Mathematical Model ........................................................................................................... 65 4.4. Econometric Methodology .................................................................................................. 68 4.4.1 Housing Demand Model ............................................................................................... 68 4.4.2Housing Quality ............................................................................................................. 70 4.4.3 Permanent and Transitory Income ................................................................................ 71 4.4.4 House Price ..................................................................................................................