Housing bubble gets bigger?

The housing loans from the financial institutions in the country have been increasing over the years. And some financial experts say that it is a bubble awaiting an eventual burst.

The credit to the housing sector accounts for at least a quarter of the total credit every year.

The loans to the sector increased from Nu 5.21 billion in 2007 to Nu 10.28 billion in June this year.

Records show that 2007-2008 did not see the increase in housing loans as much as in the preceding years. However, since 2009, the credit to the sector has been growing by Nu 2 billion annually.

If the trend continues, experts say the financial institutions will be exposed to risks in the long run.

Increasing credits to the sector will cause abundant supply of homes pushing down the rent, which will make the house owners difficult to repay their loans, say experts. This will disturb the financial system.

The Bhutanese banks concentrating their credit portfolio in the housing sector is risky and it shows they are not managing the funds well, said economist Damber Singh Kharka. “It is like putting all the eggs in one basket.”

Considering the population, the high rate of lending to the housing sector might not be good in the long run as time will come when demand for housing is not sustainable, he said.

The situation will make house owners unable to repay the loans, and banks will have no options than to seize their properties and sell them in the face of downward demand, he said.

Damber Singh Kharka said the credit that the banks disburse for constructing buildings is not really backed by the anticipated demand.  This means the increase in rent will not be parallel to the loan interest.

The chief executive officer of the Bank of Bhutan (BoB), Passang Tshering, disagrees. He says in the backdrop of the economy being at the developing stage and numerous mega hydropower projects in the pipeline, credits to the housing sector will not be a problem.

He said the bank has its thumb rule not to exceed lending to the housing sector more than 20 percent of the total credit. As long as the bank is within that belt it is not much of a concern.

However, at the moment, BoB has given 23 percent of its total credit of Nu 13 billion to the housing sector.

A Bhutan National Bank official said the bank does not foresee risks in pumping money into the housing sector. He said the bank is not that aggressive in shelling out credits to the sector. Today, the bank has reduced the housing loan to 30 percent from 43 in the past.

The Royal Monetary Authority (RMA) says the rise in housing loans is alarming but is viable as the demand for housing is high.  And the non-performing loans in the sector are also not much of a concern.

RMA officials said credits expose financial institutions to high risks if they do not have proper procedures of appraising a loan and monitoring it.

They say the housing sector will not experience bubble and burst given the shortage of housing. However, if it bursts, all the financial institutions, including the National Pension and Provident Fund, will be affected as the housing loan is one of the primary components of their total credit portfolio.

To mitigate such risks, RMA has prudential regulations in place. They include additional provisioning on highly exposed sector, 20 percent statutory liquidity requirement (SLR), 17 percent cash reserve ratio (CRR), among others.

RMA says excessive lending for long-term investments such as housing or mortgage loans can result in crisis. “Therefore, excessive lending to the housing sector by the financial institutions [in Bhutan] has a potential to generate problems in the financial sector,” said RMA officials.

The officials say the overall sustainability of the housing credit is prime for policy analyses as evidenced by the recent global sub-prime mortgage crisis.

By Pushkar Chhetri

2 Responses to “Housing bubble gets bigger?”

1. zampa says:

   October 29, 2011 at 3:31 pm

   unless government comes up with better solution for housing problem like leasing out gov land to real estate developer for low income people or gov/nhdc/nppf builds so many houses for lower rung of civil servants, the so called housing bubble will continue and low income pple will continue bearing the brunt….and of course, rich guys will become richer and continue enjoying…..sometimes, i wish our country should have been total socialist country!

   Reply
2. The Social Economist says:

   November 11, 2011 at 6:13 pm

   When the supply of houses are increasing, it will drive down prices and benefit the low income consumers in terms of low house rents. Low and middle income consumers spend more than 50-60% of their income on house rents. Lets not assume that all those houses have loans, the houses that were built long time back must have already liquidated their loans but still enjoy high rent rates. Lets not make this a speculation for the Banks to stop lending to the real estate sector. Let market forces deliver fair justice.

   Reply