ECONOMYNEXT – Sri Lanka’s central bank is keeping a watch on rising land prices in Colombo, Deputy Governor Nandalal Weerasinghe said, although there were no plans to place credit restrictions.
Prices of real estate in Colombo have been rising over the past two years, and prices of apartments have also jumped.
"We are watching property prices in Colombo," Weerasinghe told EconomyNext.
Prices of real goods, imports and exports rise when the currency collapses or interest rates are low, and real estate is a hot button for regulators as it gives early warning.
But when rates have been kept low for an extended period of time, the present value of assets such as land or buildings go up, generating asset price bubbles.
Construction and real estate were among the largest consumers of credit in recent months, according to Central Bank analysis.
"Clearly those are growth sectors," Governor Coomaraswamy said. "Real estate and construction have picked up."
"Overall … private sector credit growth has been too quick. We think, for the moment, we have taken the measures necessary to reduce private sector credit."
"Our expectation is that, by the end of the year, given current policies and if the government fiscal outlays stay pretty much on track, hopefully private sector credit will come down to 18 percent."
Some countries try to put administrative restrictions on real estate credit, sometimes on commercial property only, without allowing overall rates to go up.
But such restrictions simply make credit flow to a sector where there are no restrictions.
Analysts say the current approach of tightening policy overall, instead of ad hoc bureaucratic second-guessing decisions of private individuals and corporations, is better for stability.
Sri Lanka put credit restrictions on cars last year, after money printing and low rates expanded auto credit.
However, the credit is now flowing to construction and real estate. But the Central Bank had also stopped printing money (buying up Treasury bills), reducing pressure on the rupee.
Sri Lanka’s large property bubble broke in 2008 along with the ‘Great Recession’ after an extended period of low interest rates starting from the ‘Rate Perata’ deficit monetising period and coinciding with globally low interest rates from the Federal Reserve.
In 2011/2012, mainly a stock market and fuel subsidy credit bubble from state energy subsidies created another balance of payments and credit crisis. (Colombo/Sept08/2016)