ECONOMYNEXT – Sri Lanka’s central bank wanted the property sector to have sustained growth and there was no intention to stifle the sector, Governor Indrajit Coomaraswamy said.
Sri Lanka had low interest rates up to 2015 and excessive money printing from then on which pushed up asset prices and generated balance of payments crisis, until Governor Coomaraswamy tightened policy and engaged in consistent signalling to stabilize the credit system.
"We are trying to find out by working closely with the property developers association to have a granular understanding of what is happening there and whether or not we need to have macro-prudential measures," Coomaraswamy said.
"We want sustained growth in the sector. We do not want in any way to stifle the sector."
Coomarawamy said a gradual slowdown was seen in the sector. He said there was strong demand for middle and lower cost housing, but there was concern over luxury housing.
Sector-wise measures are needed especially when administrative controls such as loan-to-value ratios are imposed on specific sectors instead of raising rates generally.
Like a balloon squeezed from one end makes air flow to the other end, bubbles will go from cars, to property, land or stocks, usually to sectors that had not boomed recently.
However the BOP crisis is past and short term rates which responds to market signals first have already started to ease, though lending rates are yet to fall.
Over-ambitious projects are the first to run into trouble, which may have a knock on effect on other sectors as buyers and creditors get cold feet, analysts say.
Bubbles and BOP crises, an asset-price bubbles, happen when a central bank prevents rates going up early enough to curb excessive consumption and mal-investment in overly speculative ventures, which become unviable when rates go higher. (Colombo/Sept27/2017)