INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

RBI AGAIN RUNS REALTY CHECK

  AWEEK before the credit policy, RBI has said that house prices have moved up more than real income and could impact lending banks. Banks could be hit if the borrowers fail to service the loan.

   An occasional paper released by the central bank said that policy adjustments must be undertaken in a measured way to avoid adverse effects on banks' balance sheets, specifically of banks with large exposures to the housing/real estate sector.

   A pre-emptive rate hike could prove to be counterproductive while a more stringent policy could prick a housing bubble, thus damaging interests of other sectors.

   The paper concludes that sectoral measures may be more worthwhile than direct measures taken for demand compression. RBI has already raised capital and provisioning requirement for home loans as well as loans to builders.

   While all-round development of the housing sector is welcome, it is also important to take note of the pace of the cyclical growth in recognition of the risks of build up of asset price bubbles, said the study.

   Of the several factors that contribute to the occurrence of bubbles, high credit growth backed by low interest rates is considered equally more important.

   Among various conclusions drawn, the paper on “Identifying asset price bubbles in the housing market in India.” pointed out that housing prices are significantly much more sensitive to interest rate changes than supply of credit.

   Lower persistence of rates implies that the possibility of a quicker reversal in housing prices in case of a shock also cannot be ruled out completely.

   The housing industry is impacted by changes in monetary conditions, rise in interest rates or a reduction in supply of credit. Considering the fact that long term housing prices have largely moved in tandem with the actual price levels, the paper released by the central bank noted that the extent of speculation in the market is subdued. The paper also added that the market has derived large amount of support from lower interest rates and easier availability of credit.

   As against a global perspective, the paper said that even though the surge in the housing market in India is at a nascent stage, the rapid growth in bank financing towards this sector demands attention in the light of other countries' experiences.