The Reserve Bank of India (RBI) on Wednesday moved to boost the housing sector by reducing the amount of capital banks need to set aside for housing loans, as well as by reducing the provisions needed for such loans. The move has been welcomed since the real estate sector is in bad shape and particularly since the construction industry is a major source of jobs for the masses. But is relaxing these norms a prudent measure?
The question arises from the accompanying chart, taken from the Bank for International Settlements’ (BIS) quarterly review for June 2017. The chart shows the rise in real residential property prices in various countries after the financial crisis. Note that India is on top of the list and the rise in Indian residential property prices is far above Canada’s, the country ranked No. 2 on the list.
Says the BIS: “Compared with the period of the GFC (Great Financial Crisis), prices have almost doubled in India. They are one third higher in Brazil, despite the significant downward correction observed most recently, and are also slightly higher in China, Mexico and Turkey (by around 10% in each case). By contrast, prices are still below their 2007 levels in Indonesia and South Africa, and they have roughly halved in Russia."
Does the RBI really need to stoke this fire?