Is the payoff worth the compromise?

BANGLADESH real estate sector has been in a slump lately. Consumer demand for new flats and apartments have been low as unsold flats are increasingly forming a bottleneck in the sector. However, there is nothing unusual about this. As election approaches and political turmoil increases, probable investors in the sector will hold back their capital to see through the uncertainty. Consumer confidence is low in this industry as has always been the case during past elections and increasing political turmoil.

In the current budget for the fiscal year 2013-14, honourable Finance Minister Abul Maal Abdul Muhith has kept a provision for legalising undocumented income through purchase of flats and plots of land. He hinted that such an action was a compromise to stimulate the real estate sector besides increasing revenue collection to meet the ambitious Budget 2013-14. Will this provision really serve its purpose?

Since 1971, such provisions in the budget have generated a total of Tk 1407.21 crore. To put this number into perspective, this is only about 0.6% of the latest Tk 220 thousand crore budget. Therefore, it is highly unlikely that this provision will generate even 0.1% of the fund required to meet the latest budget.

Will this provision really bring the real estate sector out of its recent slump? To answer this question, we need to understand how our real estate sector has been functioning lately. Land and flat prices have been rising for several years now. Real estate prices in many regions of the country have increased by as much as 5-10 times in the past decade. As such, affordability of land and flats, typically in urban centres, are fast going out reach of even the upper middle class households in Bangladesh. This implies that this growing property bubble was mainly fuelled from investments of the upper wealthy class, an extremely small proportion of the total population. This small segment holds almost all of the "black" money that the government is aiming to bring under documentation. Hence, such a policy is bound to produce some growth for the real estate sector.

However, as stated before, investor confidence in this sector is still very low due to the approaching political uncertainty. We may have to wait till the next democratic government comes to power before we see a significant growth in this sector. Thus, compromising the government's stance on ethics and morality may not turn out to be a sound move for the Finance Minister unless he is giving in to the interest of a special privileged group.

More importantly, this provision is unhealthy for the country from a broad economic perspective. The anticipated impact of this policy will be an increase in demand of real estate property which will in turn translate to higher real estate prices. This will have some negative impacts on the economy.

An increase in the proportion of population owning some form of real estate property is commonly seen as an example of increasing socioeconomic well-being. With rising prices propped up by black money, real estate properties will go out of the reach of more people in the country. Moreover, the real estate sector may become dependent on black money holders for growth which can never be healthy for any economy. Besides, rise in real-estate prices will certainly increase the cost of setting up newer factories as pointed out by CPD in its post-budget analysis. This is bound to have a negative impact on the country's growing manufacturing sector in terms of rising cost of set-up and production. Lastly, further inflating the property bubble is only likely to increase the fear of a possible burst in the near future which may have a very bad impact on the country. Even though there is very little institutional capital tied in our real estate sector compared to many other developing and developed countries, a dramatic fall in consumer confidence is bound to happen if fear of such a burst really materialise.

So, is this compromise in the government's stance on corruption and illegal activities really worth the socioeconomic payoff? Only time will tell but past statistics and sound understanding of the country's economy tells us to be wary and expect very little out of this provision.

The writer is a third year Economics student at Princeton University. He could be reached at @ShafinFattah on twitter or at shafinfattah.wordpress.com.