Print Edition - 2014-06-29  |  Free the Words

Realty check

  • The government must come up with a new housing finance strategy to regulate the real estate sector
- Pramesh Kc
Realty check

Jun 28, 2014-

The housing market is crucial to financial stability as most depositors extensively invest their savings in this sector through Nepali Business and Financial Institutions (BFIs). But the real estate business is in currently in recession, which has made it risky to recover payoffs due to a sluggish mortgage market. This is due to the lack of a proper policy and legal framework to govern the housing finance management system in Nepal. Till date, Nepal has neither any state regulation nor a separate entity to govern the mortgage market system. A new government entity to look after the mortgage market system is therefore essential.

No policy

The Nepal Rastra Bank’s recent survey on real estate highlighted proper bank loans, a proper policy and capital gain tax as key issues. It suggested easy access to credit, a liberal credit policy and lowering interest rates as ways to resolve the problem.

The current housing finance practices are unsafe. Many  housing and apartment units are lying unsold as the majority of potential homebuyers  cannot afford them. Furthermore, unified directives issued by the country’s central bank, targeting the BFIs, are restrictive in terms of promoting the housing finance system. The Ministry of Urban Development has also been slow in coming up with a strategic vision to address the current housing market turmoil and ensure a safe, active and robust housing financing management system.

Multiple problems

Commercial banks account for over 70 percent of the total lending portfolio in the real estate sector. Product-wise credit flows of BFIs into residential housing and real estate stands at 7 and 9 percent out of their total credit flows.  In comparison to development banks and financial companies, commercial banks are more active players in the housing and real estate sector.

The demand for residential mortgage loans, nonetheless, is on an upward spiral.  But unscientific mortgage terms and conditions, unsupportive housing finance and the lack of a prudent policy on mortgage finance remain key hurdles to the housing finance market system.

Although the volume of remittances coming into the country occupies over 22 percent of the GDP, it has not been able to make a significant contribution  to the housing finance system. The reason being, most of the money coming in from outside is spent on daily consumption items and on health and education.

Meanwhile, a poor market environment and the lack of a proper mortgage system continue to adversely affect BFIs, triggering investment risks and restrictive regulations. Developers have, therefore,  shied away from putting in more money into the realty sector, further limiting the flow of money in the financial system.

The demand for affordable residential housing is rising exponentially, but such demand is being stifled by the restrictive, costly and lengthy housing finance system. The lack of proper dissemination of information, inadequate market activity and the failure to attract capital are also prime barriers to creating a better housing financing system.  

The current challenge for the government is to lower the housing construction cost and provide subsidies for civil service holders, so they can at least meet their basic need of decent shelter in their life time. It should also ensure affordable mortgage financing. The concerned state authorities ought to create an environment in which the cost of obtaining a loan for housing is reasonably priced for middle class people.

Therefore, Ministry of Urban Development should formulate new regulations and entities needed such as creating a Housing Finance Management Board. Such a board has to be tasked with creaing a  modus operandi for a safe and sound mortgage financing environment in which investors, regulators, borrowers, market conduits and mortgage originators are prime players.

The risk associated with the housing market is limited to these actors. The government’s role should be to minimise potential risks as the turmoil in the real estate business of course has  negative repercussions on the national economy.

A new plan

The government should come up with a new housing finance strategy which operates in tandem with other regulatory bodies of the government. The mortgage market is dynamic, which is more likely driven by the government’s development vision and mission for the short and long term.

The new strategy should develop a robust housing market and a public information system to create a base for monitoring. Since the housing market has a wide range of direct and indirect stakeholders, its operations must be prudent.

The recommended strategic actions, if implemented, can streamline the financial system to stabilise the country’s overall macroeconomic condition. It will also help the robust development of the real estate industry (which can lead to more employment opportunities), reduce volatility in the economy and make property development practices more efficient.

Smooth labour mobility, progress in the capital market, efficient resource allocation and a good liquidity position in Nepal’s financial system are additional advantages that can be accrued from the implementation of the suggested strategic actions.

Once the government has established the Housing Board, it can use one or a combination of  four popular mortgage financing alternatives that are currently in practice in the global mortgage financing market. These are deposit-based contractual saving, mortgage bonds, securitisation and secondary intermediation.

Of course, there are multiple factors which should be seriously considered and managed to leverage the new strategy. The aim should be to create financial stability, where large portion of market share is taken by BFIs, which are key determinants of macroeconomic stability.

KC is a management consultant and holds an MBA from TU

Published: 29-06-2014 08:42

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