Under invoicing in the residential real estate market in Pakistan
Abstract
In this paper the meaning of “under invoicing in a real estate market” signifies that the market value of real property exceeds its record value appearing in government documentation. The purpose of this study is to identify the level of under invoicing and determine the factors that affect the under invoicing in real estate markets in Pakistan. We apply OLS and Extreme Bounds Analysis techniques to test our propositions. The statistical sample consists of 338 real estate contracts. We find that under invoicing is determined by a multiplicity of factor. These include: the capital gains tax rate, the measurable amount of corruption in the economy, the risk-free rate, a buyer’s profession, the reputation of the local housing authority, and the degree of disequilibria in regional real estate markets. Our findings are consistent with four distinct hypotheses: (a) tax evasion hypothesis, (b) widening gap hypothesis, (c) a corruption hypothesis and (d) a signaling hypothesis. The evidence suggests that higher rates of taxation and a larger statistical incidence of corruption in markets tend to be associated with a greater probability of under-invoicing. The findings of the study have practical implications for those investors who are interested in real estate markets of emerging and developing economies.
First published online 05 March 2021
Keyword : under-invoicing, real estate market, tax evasion, black money, widening gap, extreme bounds analysis
How to Cite
Wahid, A., Mantell, E. H., & Mumtaz, M. Z. (2021). Under invoicing in the residential real estate market in Pakistan. International Journal of Strategic Property Management, 25(3), 190-203. https://doi.org/10.3846/ijspm.2021.14337
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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https://doi.org/10.35536/lje.2016.v21.i2.a1
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Haque, N. U. (2015). Flawed urban development policies in Pakistan. PIDE Working Papers, 1(119), 1–20.
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Hromada, E. (2015). Mapping of real estate prices using data mining techniques. Procedia Engineering, 123, 233–240. https://doi.org/10.1016/j.proeng.2015.10.083
Hui, E. C. M., & Wang, Z. (2014). Market sentiment in private housing market. Habitat International, 44, 375–385.
https://doi.org/10.1016/j.habitatint.2014.08.001
Hutchison, N., & Disberry, A. (2015). Market forces or institutional factors: what hinders housing development on brownfield land? Journal of European Real Estate Research, 8(3), 285–304. https://doi.org/10.1108/JERER-07-2015-0029
Jeribi, A. (2015). Measuring underwriter reputation: evidence from the Tunisian stock market. Corporate Reputation eJournal, 2(1), 2014–2015. https://doi.org/10.2139/ssrn.2557543
JLL and LaSalle. (2020). Global Real Estate Transparency Index 2020 Rankings. https://www.jll.co.in/en/trends-and-insights/research/global-real-estate-transparency-index/greti-globalrankings-and-methodology
Leamer, E. E. (1983). Let’s take the con out of econometrics. American Economic Review, 73(1), 31–43.
Leamer, E. E. (1985). Sensitivity analyses would help. American Economic Review, 75(3), 308–313.
https://doi.org/10.1126/science.151.3712.867-a
Levine, R., & Renelt, D. (1992). A sensitivity analysis of crosscountry growth regressions. American Economic Review, 82(4), 942–963.
Ling, D. C., Naranjo, A., & Scheick, B. (2019). Asset location, timing ability and the cross-section of commercial real estate returns. Real Estate Economics, 47(1), 263–313. https://doi.org/10.1111/1540-6229.12250
Liu, C. H., Liu, P., & Zhang, Z. (2019). Real assets, liquidation value and choice of financing. Real Estate Economics, 47(2), 478–508. https://doi.org/10.1111/1540-6229.12148
Low, S. P., Gao, S., & Teo, L. L. G. (2016). Gap analysis of green features in condominiums between potential homeowners and real estate agents: a pilot study in Singapore. Facilities, 34(11/12), 630–648. https://doi.org/10.1108/F-02-2014-0012
Moosa, I. A., & Cardak, B. A. (2006). The determinants of foreign direct investment: an extreme bounds analysis. Journal of Multinational Financial Management, 16(2), 199–211. https://doi.org/10.1016/j.mulfin.2005.07.002
Musliu, A., Sopi, L., Wood, M., & Hamidi, A. (2015). Under invoicing of imported broiler meat: a challenge to the development of the local broiler industry in Kosovo. Albanian Journal of Agricultural Sciences, 14(2), 121–126.
Newberry, R., & Collins, M. (2017). Sales role play: an online simulation. Journal of Instructional Pedagogies, 19, 1–7.
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Pakistan Bureau of Statistics. (2017b). Population census 2017. https://www.pbs.gov.pk/content/population-census
Patnaik, I., Sen Gupta, A., & Shah, A. (2012). Determinants of trade misinvoicing. Open Economies Review, 23, 891–910. https://doi.org/10.1007/s11079-011-9214-4
Pugh, C. (2001). The theory and practice of housing sector development for developing countries, 1950-99. Housing Studies, 16(4), 399–423. https://doi.org/10.1080/02673030120066527
Rathnayake, D. N., Louembé, P. A., Kassi, D. F., Sun, G., & Ning, D. (2019). Are IPOs underpriced or overpriced? Evidence from an emerging market. Research in International Business and Finance, 50, 171–190.
https://doi.org/10.1016/j.ribaf.2019.04.013
Rymarzak, M., & Siemińska, E. (2012). Factors affecting the location of real estate. Journal of Corporate Real Estate, 14(4), 214–225. https://doi.org/10.1108/JCRE-11-2012-0027
Sandmo, A. (2005). The theory of tax evasion: a retrospective view. National Tax Journal, 58(4), 643–663.
https://doi.org/10.17310/ntj.2005.4.02
Santosa, F., & Symes, W. W. (1986). Linear inversion of bandlimited reflection seismograms. SIAM Journal on Scientific and Statistical Computing, 7(4), 1307–1330.
https://doi.org/10.1137/0907087
State Bank of Pakistan. (n.d.). https://www.sbp.org.pk/ecodata/index2.asp
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The World Bank. (2019b). Population in the largest city. Retrieved April 22, 2020, from https://data.worldbank.org/indicator/EN.URB.LCTY.UR.ZS?view=chart
Tibshirani, R. (1996). Regression shrinkage and selection via the lasso. Journal of the Royal Statistical Society: Series B (Methodological), 58(1), 267–288.
https://doi.org/10.1111/j.2517-6161.1996.tb02080.x
Tufail, S., & Batool, S. (2013). An analysis of the relationship between inflation and gold prices: evidence from Pakistan.
The Lahore Journal of Economics, 18(2), 1–35.
https://doi.org/10.35536/lje.2013.v18.i2.a1
Transparency International. (n.d.). Corruption Perceptions Index. https://www.transparency.org/en/cpi/2020/index/nzl
Wahid, A., Khan, S. A., & Mumtaz, M. Z. (2019). Pricing performance of cross-listed and local IPOs: evidence from alternative investment market. Business & Economic Review, 11(3), 1–28. https://doi.org/10.22547/BER/11.3.1
Waltl, S. R. (2019). Variation across price segments and locations: a comprehensive quantile regression analysis of the Sydney housing market. Real Estate Economics, 47(3), 723– 756. https://doi.org/10.1111/1540-6229.12177
Wang, Z., & Hui, E. C. M. (2017). Fundamentals and market sentiment in housing market. Housing, Theory and Society, 34(1), 57–78. https://doi.org/10.1080/14036096.2016.1196240
Woodward, L., & Tan, L. M. (2015). Small business owners’ attitudes toward GST compliance: a preliminary study. Australian Tax Forum, 3, 1–34. https://doi.org/10.2139/ssrn.2666317
World Economic Forum. (2019). Global competitiveness report. Retrieved April 22, 2020, from https://www.weforum.org/reports/the-global-competitiveness-report-2020
Zameen. (2019). Pakistan Real Estate Price Index. Retrieved April 22, 2020, from https://www.zameen.com/index/
Ahmed Qureshi, T., & Mahmood, Z. (2016). The magnitude of trade misinvoicing and resulting revenue loss in Pakistan. The Lahore Journal of Economics, 21(2), 1–30.
https://doi.org/10.35536/lje.2016.v21.i2.a1
Alim, K., & Ramakrishnan, S. (2017). Initial public offerings (IPO) performance during hot and cold issue market in Pakistan. SSRN Electronic Journal, 1–23.
https://doi.org/10.2139/ssrn.2912413
Andrew, M., & Meen, G. (2003). House price appreciation, transactions and structural change in the British housing market: a macroeconomic perspective. Real Estate Economics, 31(1), 99–116.
https://doi.org/10.1111/j.1080-8620.2003.00059.x
Anson, J., Cadot, O., & Olarreaga, M. (2015). Tariff evasion and customs corruption: does pre-shipment inspection help? The B.E. Journal of Economic Analysis & Policy, 5(1), Article 33. https://doi.org/10.1515/1538-0645.1600
Arora, N., & Singh, B. (2019). Impact of auditor and underwriter reputation on underpricing of SME IPOs in India. Management and Labour Studies, 44(2), 193–208. https://doi.org/10.1177/0258042x19829285
Ascherl, C., & Schaefers, W. (2018). REITs and REOCs and their initial stock market performance: a European perspective. Journal of European Real Estate Research, 11(1), 4–27. https://doi.org/10.1108/JERER-10-2016-0036
Badru, B. O., & Ahmad-Zaluki, N. A. (2018). Explaining IPO initial returns in Malaysia: ex ante uncertainty vs signaling. Asian Review of Accounting, 26(1), 84–106.
https://doi.org/10.1108/ARA-11-2016-0133
Beja, E. L. (2008). Estimating trade mis-invoicing from China: 2000-2005. China and World Economy, 16(2), 82–92.
https://doi.org/10.1111/j.1749-124X.2008.00108.x
Bian, X., Brastow, R., Waller, B., & Wentland, S. (2019). Foreclosure externalities and home liquidity. Real Estate Economics, 47(4), 1–41. https://doi.org/10.1111/1540-6229.12301
Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior and Organization, 83(2), 243–253.
https://doi.org/10.1016/j.jebo.2012.05.019
Brobert, G. (2016). The global REIT market: initial-day performance of IPOs. Journal of European Real Estate Research, 9(3), 231–249. https://doi.org/10.1108/JERER-03-2016-0015
Brounen, D., Marcato, G., & Silvestri, E. (2019). Price signaling and return chasing: international evidence from maturing REIT markets. Real Estate Economics, 47(1), 314–357. https://doi.org/10.1111/1540-6229.12247
Cassara, J. A. (2016). Trade-based money laundering: the next frontier in international money laundering enforcement. Wiley. https://doi.org/10.1002/9781119125389
Chen, C., Shi, H., & Xu, H. (2013). Underwriter reputation, issuer ownership, and pre-IPO earnings management: evidence from China. Financial Management, 42(3), 647–677. https://doi.org/10.1111/fima.12006
Cheng, P., & McMillan, D. (2015). Do initial reserves signal longterm IPO stock performance? Cogent Economics & Finance, 3(1), 1018697. https://doi.org/10.1080/23322039.2015.1018697
Choudhry, R. M., Gabriel, H. F., Khan, M. K., & Azhar, S. (2017). Causes of discrepancies between design and construction in the Pakistan construction industry. Journal of Construction in Developing Countries, 22(2), 1–18.
https://doi.org/10.21315/jcdc2017.22.2.1
Cooley, T. F., & LeRoy, S. F. (1981). Identification and estimation of money demand. American Economic Review, 71(5), 825–844.
Gulzar, A., Junaid, N., & Haider, A. (2010). What is hidden, in the hidden economy of Pakistan? Size, causes, issues, and implications. Pakistan Development Review, 49(4), 665–704. https://doi.org/10.30541/v49i4iipp.665-704
Haque, N. U. (2015). Flawed urban development policies in Pakistan. PIDE Working Papers, 1(119), 1–20.
Hasan, A. (2010). Migration, small towns and social transformations in Pakistan. Environment and Urbanization, 22(1), 33–50. https://doi.org/10.1177/0956247809356180
Hromada, E. (2015). Mapping of real estate prices using data mining techniques. Procedia Engineering, 123, 233–240. https://doi.org/10.1016/j.proeng.2015.10.083
Hui, E. C. M., & Wang, Z. (2014). Market sentiment in private housing market. Habitat International, 44, 375–385.
https://doi.org/10.1016/j.habitatint.2014.08.001
Hutchison, N., & Disberry, A. (2015). Market forces or institutional factors: what hinders housing development on brownfield land? Journal of European Real Estate Research, 8(3), 285–304. https://doi.org/10.1108/JERER-07-2015-0029
Jeribi, A. (2015). Measuring underwriter reputation: evidence from the Tunisian stock market. Corporate Reputation eJournal, 2(1), 2014–2015. https://doi.org/10.2139/ssrn.2557543
JLL and LaSalle. (2020). Global Real Estate Transparency Index 2020 Rankings. https://www.jll.co.in/en/trends-and-insights/research/global-real-estate-transparency-index/greti-globalrankings-and-methodology
Leamer, E. E. (1983). Let’s take the con out of econometrics. American Economic Review, 73(1), 31–43.
Leamer, E. E. (1985). Sensitivity analyses would help. American Economic Review, 75(3), 308–313.
https://doi.org/10.1126/science.151.3712.867-a
Levine, R., & Renelt, D. (1992). A sensitivity analysis of crosscountry growth regressions. American Economic Review, 82(4), 942–963.
Ling, D. C., Naranjo, A., & Scheick, B. (2019). Asset location, timing ability and the cross-section of commercial real estate returns. Real Estate Economics, 47(1), 263–313. https://doi.org/10.1111/1540-6229.12250
Liu, C. H., Liu, P., & Zhang, Z. (2019). Real assets, liquidation value and choice of financing. Real Estate Economics, 47(2), 478–508. https://doi.org/10.1111/1540-6229.12148
Low, S. P., Gao, S., & Teo, L. L. G. (2016). Gap analysis of green features in condominiums between potential homeowners and real estate agents: a pilot study in Singapore. Facilities, 34(11/12), 630–648. https://doi.org/10.1108/F-02-2014-0012
Moosa, I. A., & Cardak, B. A. (2006). The determinants of foreign direct investment: an extreme bounds analysis. Journal of Multinational Financial Management, 16(2), 199–211. https://doi.org/10.1016/j.mulfin.2005.07.002
Musliu, A., Sopi, L., Wood, M., & Hamidi, A. (2015). Under invoicing of imported broiler meat: a challenge to the development of the local broiler industry in Kosovo. Albanian Journal of Agricultural Sciences, 14(2), 121–126.
Newberry, R., & Collins, M. (2017). Sales role play: an online simulation. Journal of Instructional Pedagogies, 19, 1–7.
Pakistan Bureau of Statistics. (2017a). 6th population and housing census. Pakistan Bureau of Statistics.
Pakistan Bureau of Statistics. (2017b). Population census 2017. https://www.pbs.gov.pk/content/population-census
Patnaik, I., Sen Gupta, A., & Shah, A. (2012). Determinants of trade misinvoicing. Open Economies Review, 23, 891–910. https://doi.org/10.1007/s11079-011-9214-4
Pugh, C. (2001). The theory and practice of housing sector development for developing countries, 1950-99. Housing Studies, 16(4), 399–423. https://doi.org/10.1080/02673030120066527
Rathnayake, D. N., Louembé, P. A., Kassi, D. F., Sun, G., & Ning, D. (2019). Are IPOs underpriced or overpriced? Evidence from an emerging market. Research in International Business and Finance, 50, 171–190.
https://doi.org/10.1016/j.ribaf.2019.04.013
Rymarzak, M., & Siemińska, E. (2012). Factors affecting the location of real estate. Journal of Corporate Real Estate, 14(4), 214–225. https://doi.org/10.1108/JCRE-11-2012-0027
Sandmo, A. (2005). The theory of tax evasion: a retrospective view. National Tax Journal, 58(4), 643–663.
https://doi.org/10.17310/ntj.2005.4.02
Santosa, F., & Symes, W. W. (1986). Linear inversion of bandlimited reflection seismograms. SIAM Journal on Scientific and Statistical Computing, 7(4), 1307–1330.
https://doi.org/10.1137/0907087
State Bank of Pakistan. (n.d.). https://www.sbp.org.pk/ecodata/index2.asp
The World Bank. (2019a). Ease of Doing Business Index. Retrieved April 22, 2020, from https://data.worldbank.org/indicator/IC.BUS.EASE.XQ
The World Bank. (2019b). Population in the largest city. Retrieved April 22, 2020, from https://data.worldbank.org/indicator/EN.URB.LCTY.UR.ZS?view=chart
Tibshirani, R. (1996). Regression shrinkage and selection via the lasso. Journal of the Royal Statistical Society: Series B (Methodological), 58(1), 267–288.
https://doi.org/10.1111/j.2517-6161.1996.tb02080.x
Tufail, S., & Batool, S. (2013). An analysis of the relationship between inflation and gold prices: evidence from Pakistan.
The Lahore Journal of Economics, 18(2), 1–35.
https://doi.org/10.35536/lje.2013.v18.i2.a1
Transparency International. (n.d.). Corruption Perceptions Index. https://www.transparency.org/en/cpi/2020/index/nzl
Wahid, A., Khan, S. A., & Mumtaz, M. Z. (2019). Pricing performance of cross-listed and local IPOs: evidence from alternative investment market. Business & Economic Review, 11(3), 1–28. https://doi.org/10.22547/BER/11.3.1
Waltl, S. R. (2019). Variation across price segments and locations: a comprehensive quantile regression analysis of the Sydney housing market. Real Estate Economics, 47(3), 723– 756. https://doi.org/10.1111/1540-6229.12177
Wang, Z., & Hui, E. C. M. (2017). Fundamentals and market sentiment in housing market. Housing, Theory and Society, 34(1), 57–78. https://doi.org/10.1080/14036096.2016.1196240
Woodward, L., & Tan, L. M. (2015). Small business owners’ attitudes toward GST compliance: a preliminary study. Australian Tax Forum, 3, 1–34. https://doi.org/10.2139/ssrn.2666317
World Economic Forum. (2019). Global competitiveness report. Retrieved April 22, 2020, from https://www.weforum.org/reports/the-global-competitiveness-report-2020
Zameen. (2019). Pakistan Real Estate Price Index. Retrieved April 22, 2020, from https://www.zameen.com/index/