House prices

Falling house prices will hit lending banks: RBI report says

Falling property prices will impact lending banks, the Reserve Bank of India (RBI) said in its June 2022 Financial Stability Report.

He said that since the financed property is the underlying collateral for home loans, any price fluctuations will have implications for lenders.

He said property prices had been subject to shocks and it was found that even after a substantial fall in prices, the system-level capital-to-asset risk ratio (CRAR) would still be much higher. the regulatory requirement of 9%.

“However, at the level of an individual bank, shocks of 55%, 60% and 80% decline in the value of the collateral can cause the capital of one, two and three banks, respectively, to fall below the regulatory limit,” he added. adds the report.

The RBI cited the global financial crisis of 2008 to highlight how the sharp decline in property prices can add stress to the financial system.

“The resilience of major scheduled Indian Commercial Banks (SCBs) to prolonged house price declines is tested, using account-level data, unlike the macro stress test presented earlier. The housing sector is examined in isolation and only real estate prices are subject to shocks, but in a conservative attitude,” the report says.

He nevertheless mentioned that sales growth in the housing sector turned positive in the second quarter or in 2022.

“The number of home loans has maintained double-digit growth. On the other hand, house price growth as measured by the Reserve Bank’s All India House Price Index (HPI) remains below 5% and currently stands at 1.8. % “, did he declare.

The report, however, adds that with the removal of waivers and rising interest rates, home sales growth has also lost momentum and the inventory overhang is still well over 36 months.

A recent report by ICICI Securities had also suggested that overall FY22 sales volumes across India’s eight Tier I cities were up 41% year-on-year (yoy), at same level as FY20 sales volume, and unsold inventory was down 46 months. from March 2020 to 36 months from March 2020.

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