Sunday, May 9, 2010

Policymakers are experimenting with ways to stop a property boom

Almost uniformly the response of the common man in India is that the prices of residential flats have become unaffordable. Mint points out that RBI's house price index for Mumbai reached a peak of around 230 (Q2, 2008), fell to around 150 (Q4, 2008) and went beyond 250 (Q4, 2009).

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Mumbai property prices have gone up 2.5 times between 2003 and the end of 2009  even as GDP went up 2.3 times. Perhaps we get the feeling that prices have run up faster in recent times as the RBI's index moved up 50 points in four years and more than 100 points in the next two years, even as the number of transactions went up sharply since Q2, 2009.  The RBI report on macroeconomic and monetary developments says: “There has been a general upward pressure on housing prices in the recent period, which broadly co-terminates with the rise in stock prices.” 

Economic Times reports that the outlook for the commercial real estate is also optimistic. It is not as if only in India the property prices have gone up.  The Economist reports that in China house prices rose by 11.7% (in the year to March), in Canada by 17.6% and in Australia by 20% (in 8 state capitals compared with a year earlier).  In India, RBI was proactive in 2005 (atleast when compared with Western nations) when it required banks to make larger provisions against losses from property loans and forced them to set aside more capital.  Now, the substantial increase in property prices are forcing policy makers abroad to consider various options including tax on real estate that varies over the cycle (rising in property booms and falling in busts).

In western countries while market decides the allocation of resources and rates, in countries like India, central banks do engage in micro management including tinkering with the credit-allocation process, favouring some industries with credit and discriminating against others. While in normal times this would be considered as something to be avoided, in the context of the recent economic developments especially downturn seen in developed world, some of the developed countries are now following Asia’s lead. Some of the changes include:
  • In Hong Kong, banks lend homebuyers no more than 70% of the value of a home.  Their exposure to the property market is also limited to 40%.
  • In Singapore, banks cannot lend more than 80% of the value of a home.  There is also a stamp duty on all residential properties sold within a year of purchase. 
  • China proposes to increase downpayment requirements on second and third homes, as well as big first homes. It has also set a floor on mortgage rates.    
  • In Canada buyers have to make downpayment of atleast 20% on investment properties they do not occupy themselves.
While policy makers hope these would curtail the run away increase in property prices, the fact is that prices of flats have gone out of reach of the common man. With loose money policy being followed across globe, the flow of money into countries like India would continue and with PE players funding property development, the capacity of the developers to hold on to prices have also increased.  With RBI allowing reschedulement of loans during the downturn, there is no urgency on the part of property developers to sell / dispose off inventory.  Looks like the prices are not likely to come down in a hurry and the common man has to wait.