News: RBI allays realty fears

(TT 26/10/2006) Calcutta - An RBI study has said that the prices of property are on a par with the long-term equilibrium housing price index, scotching fears of an asset price bubble fuelled by speculation.

The speculative element in the build-up of domestic real estate prices to their present highs is not materially significant and, in fact, the actual housing prices are in close convergence with the long-term equilibrium housing price index.

This has been brought out through empirical data collected monthly between April 2002 and June 2005 by the Reserve Bank of India today ahead of its quarterly review of monetary policy on October 30.

Prepared by Himanshu Joshi, director, monetary policy department, RBI, the study, however, pointed out that “the growth in real income (of individuals) played only a minor role in determining housing prices, reflecting an adverse selection in overall bank financing in the housing sector”.

Stating that housing prices are much more sensitive to interest rate changes than availability of the credit, the study suggested that the apex bank should carefully evaluate the consequences of monetary policy, especially when the housing market is seized by price bubbles.

“A pre-emptive hike in interest rates, over and above what is judged necessary for overall price stability purposes, may well be counterproductive,” it noted.