Almost 80% of the wealth accumulated by Pakistani households by the time they are 60 to 65 years old is made up of residential properties, according to a recent World Bank study.
This is despite the fact that these households’ net worth is enormous. The typical Pakistani household’s net worth increases by 60 months’ worth of consumption between the ages of 25 and 65. (5 years).
Residential housing makes up the majority of this growth, whilst other types of wealth like land, durables, company and agricultural values, and financial assets stagnate over time. Early in life, asset accumulation is gradual; it picks up between the ages of 40 and 65.
The financing of elderly consumption will be a significant challenge in the future due to a combination of factors including population aging, failing families, deteriorating village risk-sharing networks, and low formal pension coverage, according to a study titled “Life Cycle Savings in a High-Informality Setting — Evidence from Pakistan” published earlier this week.
When compared to other investment possibilities, real estate, and land are a safe bet, as evidenced by the fact that households save largely in these areas. According to the study, the housing may be a strategy to permanently store resources in a way that makes them difficult for other family members to steal or use against them.
The study suggests that it could also be due to a lack of access to other trustworthy, secure, and high-return long-term saving choices. Participation in alternative saving methods may be hindered by low levels of financial literacy, numeracy, and familiarity with conventional banking institutions. The study emphasized that Pakistan has expanded financial inclusion considerably more slowly than other surrounding countries and that these restrictions must be removed.
Despite being a safe investment, the home is relatively illiquid, which depletes funds for short-term consumption smoothing. Only 3% of Pakistani adults (15 and older) report being able to rely on savings for emergency finances, while 49% said it is impossible to come up with emergency funds. According to 41% of people ages 15 and older, family or friends are typically the primary sources of emergency finances; 25% report borrowing for medical expenses.
Theoretically, policies that permit more real estate assets to be used as collateral for loans made through official financial institutions should lessen the need for liquid precautionary deposits and free up funds for retirement savings. However, these programs might also promote excessive debt and result in evictions. According to the study, expanding options for secure long-term savings outside of the housing through the use of government-sponsored or subsidized old-age savings instruments could lead to more independence in the old life and lessen the burden on younger families.
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