The overheated realty sector has begun to cool off. Anecdotal evidence and statistics at land revenue offices in Kathmandu Valley suggest a sharp decline in land transactions and in prices. Cooling off of the realty sector is good news, but it is not without accompanying pain. The scale of the drop in land prices and transactions seems too huge to cope with for investors in realty and financial institutions that have made huge lendings to the sector.
[The records at the land revenue office at Chabahil, Kathmandu show that average daily land transactions have dropped to 80 from 250 last year.] Records at the land revenue office at Dillibazar show a similar trend as average per day transactions have dropped from about 200 a year ago to just 50. And anecdotal evidence from individuals and firms involved in the realty sector suggests that the lack of buyers in recent months has begun to pull down land prices by as much as 30 percent. The slump in realty will have huge implications. The exposure of the financial institutions to this sector is huge-- it´s estimated that it has sucked in some 300-400 billion rupees. And not all of this lending was prudent. In the race to make easy money many financial institutions, especially finance companies and cooperatives, have made sloppy loan decisions. Many finance companies and cooperatives have themselves invested in realty, flouting standard norms and regulations. This should not leave the impression that the commercial banks have reason to be sanguine. Some commercial banks--big and small-- have made lending decisions without properly checking the cash flow situation of the borrowers, as often happens when personal connections trump standard banking procedures. We have to wait for many more months, even years, to see how all this plays out in the banking sector. The losses and adjustments to individuals and firms will be painful, but the cooling off of the realty sector is good news for the long-term financial health of the country. So long as the realty sector was booming, investors big and small and even small savers scurried to invest in land. Land prices doubled in less than a year, making every other investment opportunity pale in comparison in terms of returns. But that wasn´t going to be sustainable and it now seems realty is headed for a crash. Unsustainable property bubbles have wrecked havoc on economies around the world, so any bubble phenomenon here should be stopped before it becomes unstoppable. The intervention by the central bank a year ago to check overheating in the sector was a welcome move, but we wonder whether it came too late, and after enough damage was already done.
source: republica