Runaway rise in prices of home loans

Economists allocate to the housing market a critical role in the conduct of monetary policy. According to Frederic Mishkin, "to achieve the dual goals of promoting price stability and maximum sustainable employment, monetary policy makers must understand the role that housing plays in the financial transmission mechanism if they are to appropriately set policy instruments."
Some observers claim that the Federal Reserve's excessively easy monetary policy in the first half of the current decade helped create a housing bubble, the inevitable collapse of which triggered the recent global financial crisis.
Role of Urbanisation: In the Indian context, research on housing prices and its implications for monetary policy action is handicapped by a lack of reliable data. The NHB RESIDEX, an Index which tracks movement of prices in the residential housing segment, compiled by the National Housing Bank, is available only from 2007.
The lack of reliable data, however, cannot conceal the fact that housing prices in India, particularly in select cities, have increased multi-fold in recent years. Informal information reveals that cost of a 2BHK flat in a particular location in Mumbai zoomed from around Rs 9 lakh in 2000 to Rs 70 lakh by 2008. There has been a similar skyrocketing of prices across major cities in India.
What explains such a phenomenon? High economic growth on a sustained basis for the last two decades has played a significant role. Rising incomes of those who benefited from the growth process may have fuelled the demand for more and better housing.
More importantly, as suggested by one report, India's rapid economic growth has set the stage for a fundamental change and dislocated a sizeable population from the countryside to urban areas.
As per the latest Census, the population of the NCT of Delhi grew by 46.31 per cent between 1991 and 2001, compared with the all-India figure of 21.34 per cent.
In the context of housing, the expanding middle class centered in the cities is instrumental in creating a high demand for housing, as in the case automobiles and other consumer durables.
The rise in housing prices is exacerbated by the heavy urban concentration of prime service sector jobs pertaining to banking, finance and IT-related activities. Expectations of an ascent in property prices may have contributed to a growing demand for investment in housing, creating additional pressure on housing prices.
Spray in Home Loans: The rapid expansion of home loan could have played a critical role in driving up prices. As per RBI data, the housing loan portfolio of the commercial banks witnessed an average growth of 34.0 per cent during 1996-2009, compared with an average growth of 20.6 per cent in the total loan portfolio.
Average growth in housing loans during 1999-2007 was as high as 44.7 per cent, before it decelerated to 11.6 per cent in 2007-09.
The growth of housing loans is both a cause and an effect of rising housing prices. On the one hand, easy loan availability augments the demand for housing and fuels upward housing prices. On the other hand, escalating housing prices raise the value of the collateral and facilitate housing loan growth.
The following Table reveals that while the housing loan portfolio experienced rapid growth, there were significant differences in the rates of growth across various bank groups.
Bank Behaviour: What underlies the high disparity in the growth of housing loan segment vis-à-vis other segments in the loan portfolio of banks? Further, how did Indian private banks and foreign banks expand the housing loan portfolio so rapidly, compared with public sector banks?
The answers to these questions will provide useful insights for analysis of bank behaviour in India.
Click to Send free sms in anywhere in India

View this post on my blog: http://www.federalpersonalloan.com/federal-personal-loan/runaway-rise-in-prices-of-home-loans.html