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Beware housing bubble: Parekh

Our Bureau

Mumbai , June 17

THERE is a need to make sure that all the stakeholders in the housing sector - development authorities, regulators, housing finance companies, banks and developers - work together to check the speculative angle in rising residential property prices, Mr Deepak Parekh, Chairman, HDFC, has said.

Writing in the company's 2004-2005 annual report, he noted that it was probably for the first time in history that so many countries across the world were simultaneously witnessing a housing boom. "In this scenario I cannot help but be reminded of what Stephen Roach, Chief Economist, Morgan Stanley, said recently, "Housing is an asset class as prone to excess as stocks, bonds, currencies and commodities. If it feels like a bubble, acts like a bubble and looks like a bubble, it probably is one."

"At the risk of sounding overcautious, I would like to draw your attention to pointers that support the idea that housing markets could be more prone to bubbles than stock markets. One of the reasons is imperfect information. No two homes are alike nor are there exchanges where prices are recorded. There are no organized futures or options markets for properties, so it is a market with no place for short selling.

"Moreover, rising property prices encourage banks and financial institutions to lend more, since collateral values increase. But when prices fall, banks pull out, amplifying the bust."

He said that today, warning signs are flashing in many global housing markets. Property market surveys have revealed that the ratio of housing prices to average disposable incomes is touching unsustainable levels.

In the US, house price inflation has been at double-digit rates since the past year. Another country feeling the pressure to curb speculation and keep the property market healthy is China.

"In India, residential property prices in some areas have recorded a growth of about 15 to 20 per cent in the last two years. This has raised concerns, and one of the questions being repeatedly highlighted is whether the escalation in demand and the resultant uptrend in prices have been driven purely by low interest rates and rising levels of affluence, or whether the success story has a speculative angle attached to it." This, Mr Parekh said, required all stakeholders in the sector to work together and introduce sufficient checks and balances to addresses the speculative angle.

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