Fall In Real Estate Prices Will Hit Lending Banks: Says RBI report

Fall in real estate prices will have an impact on the lending banks, the Reserve Bank of India (RBI) has said in its Financial Stability Report of June 2022.

It said that since the financed property is the underlying collateral in housing loans, any price fluctuation will have implications for the lenders.

It said house prices were subjected to shocks, and it was found that even after a substantial price fall, the system level capital-to-risk weighted assets ratio (CRAR) would remain well above the regulatory requirement of 9 per cent. 

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

The RBI cited the global financial meltdown of 2008 to underscore how the steep drop in housing prices can add to the stress in the financial system. 

“The resilience of top Indian scheduled commercial banks (SCBs) to prolonged drops in house prices is tested, using account level data, unlike the macro stress test presented earlier. The housing sector is looked at in isolation and only property prices are subjected to shocks, but in a conservative stance,” the report said. 

It nevertheless mentioned that sales growth in the housing sector had turned positive in Q2 or 2022.

“Housing loan numbers have maintained double-digit growth. On the other hand, the growth in housing prices, as measured by the all-India house price index (HPI) of the Reserve Bank, remains below 5 per cent and presently sits at 1.8 per cent,” it said.

The report, however, added that with waivers being discontinued and with interest rates rising, the growth in house sales has also lost momentum and 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 grew by 41 per cent year-on-year (y-o-y), at par with FY20 sales volume, and unsold inventory had declined from 46 months as of March 2020 to 36 months as of March 2020.

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