Boom in the unreal estate

NepaliTimes, Issue #443 (13-Mar-09 to 19-Mar-09)
Suresh Neupane

The housing bubble is intricately linked to the credit market

Despite the downturn in the economy, there is one sector that is booming: real estate and construction.

With more than $1.5 billion coming into the country from remittances, people have nowhere to invest but in land and housing. The last year has seen a continued boom in construction with house and land prices sky rocketing.

As the competition to buy houses and apartments get hotter by the day, banks are racing each other to offer loans to prospective buyers. Anyone able to pay Rs10,000-12,000 a month as EMI can easily obtain a housing loan. This trend is catching on even in the Karnali. "Every day 20-30 people come to inquire about home loans," says Susan Lal Shrestha of Bank of Kathmandu, "if they have all the papers right we give the loan within a week."

The commercial banks are more ready to hand out private loans than they are to invest in industry and development projects because they consider it less risky and they can get better overall returns. Nepal Rastra Bank says that in the last six months of 2008, commercial banks granted housing loans worth Rs29.5 billion, offering loans even for interior decoration and furtniture.

Abhishesh Dhakal, manager at Everest Bank says, "The emphasis is not just on the house but on the environment as well. The appeal of home loans has increased not just in the capital but in other districts such as Ittahari, Biratnagar, Butwal and Dhangadi." Dhakal says that 80 per cent of Everest Bank's consumer banking is based on home loans.

While some are highly critical of this booming investment in housing an official at the central bank says this is good for the economy because of the downstream effect on creating employment in the brick, cement, iron, paint and furnishings industries.

But if remittances from those working overseas continues to decline, middle class consumers will have difficulty re- paying their loans. Bhupendra Pandey, head of corporate banking in Rastra Banijya Bank says: "Families use the money to buy land and houses in the districts. Some come into the capital and turn to the banking sector for additional financing. With remittances seeing a slowdown, the housing sector will surely be affected." The fall in remittances will also decrease the loan capacity of the banks as deposits drop.

Some believe the banking sector is sound and will not be buffeted by a potential bursting of the property bubble. In the 1990s the buyer had to put down a 20 per cent cash deposit before getting an 80 per cent loan. Now buyers have to put down a 60 per cent deposit. But Himalayan Bank's Thamel branch manager, Rabindra Pradhan concedes: "The whole financial sector is after the housing business and so the risk is increasing."

It is not just the private and new banks that have turned their attention to the housing sector, the country's oldest Nepal Bank and Rastra Banijya Bank are also investing in this area. Binod Atreya, CEO of Nepal Bank says, "Although the sector is an attractive investment option, we have to investigate thoroughly before making any decision." Nepal Bank has granted home loans of over Rs1 billion to more than 900 customers.

Home loans are the chief focus at Nabil Bank as well. Raveena Joshi of Nabil says: "A few years ago our focus was on car loans, now it has shifted to housing." Nabil offers an interest rate of 10 -10.5 per cent for a period of five to 20 years. Everest bank, which was probably the first bank to introduce home loans, has helped over 2,800 homeowners. It offers 8.5 per cent interest for five years and at 10 per cent for 20 years.

With such high interest rates, it is not surprising that commercial banks are inclined towards home loans.

Forty per cent of the total loans by newly opened banks are for home loans.

With government spending on development low and the financial sector channeling all its investment in one area, bankers admit that this is like putting all our eggs in one basket.