Checking realty market

Nepal Rastra Bank has taken measures to contain overheating realty market in Nepal to avoid crisis that could hurt financial sector and commoners alike. The central bank has capped investment limit in realty sector (housing and real estate combined) at 25 percent of total loan portfolio of the banks and has asked them to bring it within it by the end of fiscal year 2012/2013. The central bank has also directed the lending banks that their realty loans cannot exceed 60 percent of the fair market value of the project/collateral. As recently as Wednesday, the central bank changed its lending policy effectively raising interest rate on its loans to the banks. The policy change was also aimed at raising market interest rates to discourage unnecessary consumption and speculative investment in the realty sector. This policy change and liquidity crunch in the market is already pushing up the lending rates. As a result, the interest rates on home and auto loans have already gone as high as 14 percent and 13 percent respectively. The interest rates on speculative real estate investment have even touched 17 percent.



There were enough signs that the realty market in Nepal was already overheating with prices doubling almost every year. Given generous lending rates; banks more than willing to invest in the realty market, and with virtually no other investment opportunities, investors—big and small—made speculative investments at an unprecedented rate. Result: Real estate transactions and prices rocketed as did profits. Even the speculative investors, property developers and real state brokers themselves were surprised at how fast they were making money. But the real estate bubble hit hard the end-users, especially the middle- and lower-middle class families, who wanted to buy house to live or purchase land to build house. For fixed income earners like civil servants and professionals, owning a house in Kathmandu or in other major towns has already become a pipe-dream.



This is a welcome policy change, but how effectively will the cap on realty loans work remains to be seen. Going by the exposure of commercial banks’ loan in realty sector, it doesn’t seem that the policy will have much of an impact. Of the 27 commercial banks in operation, only two have crossed the 40 percent limit set by the central bank. And majority of the large commercial banks are operating well below the limit. But the rising interest rates and 60 percent investment limit (of the fair market value of the project/collateral) will have a significant impact on realty loans. The psychological impact of the central bank’s decision is likely to be even bigger on realty investment. Such policies often dampen the confidence of the buyers and seller in realty market.

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