The Real Estate Regulation and Development Bill (RERD), recently cleared by the Cabinet, is a milestone and is expected to usher an era of professionalism and transparency in the housing sector. Housing is an important sector accounting for nearly 8% of total banking credit or about 4% of GDP as of March 2012 and, therefore, has also to be a concern for RBI, especially when house prices rise rapidly.
Asset prices are very important for monetary policy because when bubbles, big or small, burst, the cleaning up of the mess is a long and unhappy experience. Spain and the US are classic examples where the crisis erupted from the housing sector and economic recovery continues to be sluggish even after 6 years of the beginning of correction. In the US, housing markets, though recovering, continue to be weak, and are expected to be subdued over the medium term. The delinquency rate in the US, directly impacting the banks, continued to be above 10% in Q4 2012. In Spain, house prices rose by nearly 200% between 1996 and 2007 and the mortgage debt-to-GDP ratio doubled from 30% in 2001 to 61% in 2007. In a country with about 17 million families and 23 million houses, the housing bubble was waiting to burst as nearly 25% of the houses were unoccupied. Consequently, home prices had a free fall, declining by more than 26% in first three years, and according to IMF were expected to decline further. IMF (2013) explains the weak tail of firms due to construction and seeks greater vigilance of bank asset quality by supervisors as banks are holding hard-to-value real estate assets. In the US, probably because of a well-developed housing sector, the economy has been able to withstand the shock of a great recession. But not Spain.
In India, housing mostly embodies lifetime savings of an individual and, therefore, the government, especially the state government and urban local bodies, needs to be sensitive to housing sector. The central government and the financial regulators, RBI and National Housing Bank (NHB), are making concerted efforts but more efforts are required at the state level. In the absence of any single dedicated regulator or supervisor at the state level, under whose jurisdiction housing and land issues are covered, practices in the housing sector have continued to be non-transparent providing fertile grounds for unaccounted flow of money. Anecdotal illustrations are many?numerous buildings in Thane and Mumbai which collapse due to monsoons or even otherwise, as well as non-regularised colonies randomly emerging in fast growing urban areas which eventually get regularised routinely.
In India, urbanisation has been progressing rapidly and urban population is expected to increase rapidly to more than 600 million persons in 2030 from about 360 million persons in 2011. In urban areas, housing construction has been taking place unplanned which has resulted in a situation where 62% of the newly constructed houses between 2007 and 2012 are unoccupied. To ensure planned urbanisation, there is a need for active town planning, strictly implemented by the state and local bodies, to avoid congestion and ensure optimal use of scarce urban land. Hopefully, with RERD, housing market will improve.
The housing prices, according to RBI?s recent annual policy documents, have consistently been rising, probably reflecting shortage. To begin with the initiatives on the housing sector, the estimates of housing shortage at 25 million in 2007 and 18 million in 2012 derived mainly by the technical group on the basis of assumptions of congestion may need to be revisited to effectively decipher the variations across states. To estimate congestion, a uniform formula was applied across the country and was broadly based on the assumption that a married couple did not have an exclusive room to itself in the household. Therefore, what was called a housing shortage may simply have been a ?room? shortage to a significant extent! To address the problem of estimates of housing shortage, there probably is a need to undertake surveys in different states and regions to assess the congestion factor as it could vary depending on different socio-economic segments of the population spread across different climatic, cultural and geographical zones of India.
Finally, as asset prices are an important issue for the monetary policy, especially when asset quality of banks has been worsening since 2011, there is need to encourage extensive research, in-house and through academia. NHB could conceive a Handbook of Housing Statistics, providing long-term data series on various parameters related to housing. As asset prices are important for monetary policy and banking, as demonstrated by Spain and the US, RBI also needs to strengthen research on housing and publish high frequency data on a regular basis.
The author is RBI chair professor, IIM Bangalore