Realty prices may pose risk to banking system

The strong demand for housing and home finance in India are likely to maintain pressure on the real estate prices (read high property prices). The elevated prices along non transparency may lead asset bubble" in the market and pose risk to banking system, according to Rakesh Mohan, deputy governor, Reserve Bank of India.
The demand for housing finance has emerged as a key driver of bank credit in the past few years. As incomes grow further and the pace of urbanisation picks up, and, in view of the substantial backlog, demand for housing and housing finance can be expected to record continuous high growth over the next few years, Mohan said while talking on India’s financial sector reforms at Yale University in US.
In view of the expected high demand, pressure on real estate prices may continue. Moreover, real estate markets are characterised by opacity and other imperfections in developing countries, and certainly in India. Such developments can easily generate bubbles in the real estate market, because of problems in the elasticity of supply, and information asymmetries.
The strong demand for housing and buoyancy in real estate prices in an environment of non-transparency, thus, could potentially pose risks to the banking system, he said.
The deputy governor said in conjunction with interest rate cycles, the banking system as well as the regulator would need to be vigilant to future non-performing assets and the US-like subprime woes.

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