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Skyrocketing Real Estate Prices Strain Asian Banks


Skyrocketing Real Estate Prices Strain Asian Banks

Last updated: May 28 2007
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  • Skyrocketing Real Estate Prices Strain Asian Banks

    It’s not just RBI, but International Monetary Fund (IMF) and central banks across Asia too are concerned over the spiralling property prices and the possible impact on the banks’ books.

    In its regional economic outlook for Asia-Pacific, IMF has warned that although rising home loans portfolio appears to be manageable, if home loans continue to grow at the current pace, it may pose challenge to the banks as well as the regulator. It has cited the recent crisis in the US sub-prime market and warned that financial sector woes triggered by housing can spread faster across the economy than expected.

    In the 12 economies IMF studied, housing price increase has averaged 4.5 percent during 2002-06. Only three countries — China, India and New Zealand — experienced real annual price rise of more than 8 percent during the period.

    It has also noted that, in general, a rapid rise in the ratio of housing prices-to-household income may suggest that housing is becoming less affordable and, therefore, the gains in housing prices may not prove sustainable.

    Mortgage lending has been rising rapidly in the region. The rate of growth in housing credits has generally exceeded those in other segments. China, in particular, has seen a spectacular takeoff from low levels in the late 1990s while most other Asian countries have seen the stock of real housing credit double over the period.

    Though home loans have grown rapidly, they account for a significantly low portion of GDP compared to advanced economies. Yet, it should be noted that total financial sector exposure to real estate is higher than suggested by mortgage-lending data alone, as loans to developers or other players — for which data is scarce — could be large, IMF has said.

    So far, growing exposure to mortgage lending does not appear to pose a threat to financial sector stability, but challenges may grow. Rapid growth in lending as seen in some countries can present challenges to financial institutions and supervisors, and is often accompanied by a relaxation of lending standards. It is important for financial regulators to ensure that housing lenders have an adequate financial buffer against a reasonable worst-case scenario of falling housing prices.
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