1 May 2021 12:00 am Views - 1077
Sri Lanka’s frothy housing market gained steam after the Central Bank cut interest rates to record lows and set a ceiling rate since December last year, sending the appetite and prices of housing soaring.
For instance, the housing prices in Sri Lanka have gained by over 20 percent since the second quarter in 2020 through the first quarter this year, entering a period of one of the highest gains in prices of houses in Sri Lanka after a long time.
Sri Lanka’s typically red-hot housing market went into a period of moribund stage till 2019, as interest rates rose, business and investment killing taxes were imposed and people and businesses lost confidence in the economy, due to lack of clarity on policy during the five years that ended in 2019.
The realtors, who waited for a catalyst from the 2019 presidential election to change their fortunes, met with an unexpected event in the scale of a pandemic last year but the monetary policy came into their quick rescue, as people and developers drew back into the real estate sector faster than expected.
For instance, the real estate and broader construction segment was one of the fastest to return to normalcy since the end of lockdowns in May, as the former staged a rebound with a 3.4 percent growth in the fourth quarter and the latter recorded a 1.2 percent growth form a year ago period.
According to a study carried out by the rating agency ICRA Lanka Limited this week, the large increase in the housing prices is however coming with a “stark contrast” to apartment and land prices.
They tried to tie the soaring housing prices to import controls, which have driven the cost of construction since last year, apart from the lowest interest rates, which is acting as the biggest catalyst behind the most recent development.
“Higher cost of construction triggered by the import controls may also be keeping the house prices buoyant,” ICRA Lanka added.
Sri Lanka is currently operating with the lowest ever interest rates in its entire history and the salaried individuals can obtain housing loans for 7 percent interest rate, fixed for five years and balance period with a floating rate linked to the average weighted prime lending rate, plus a maximum margin of 1.0 percent.
This ceiling rate is drawing thousands of middle-income class salaried employees into this scheme to make their housing dream a reality, which otherwise seems very much elusive for the present generation compared to the last.
The Monetary Board recently said it stands guard against any excesses, which could come out of the excessive monetary stimulus, as such a policy could push prices higher and could create bubbles in certain asset classes.
Even prior to the ceiling rate came, housing, which also consists of purchasing new houses, construction of houses and repairing, accounted for 9.4 percent of total outstanding private sector credit in the licensed commercial banking sector, the most of any single sector.
The broader construction sector, which includes housing, accounted for the lion’s share, with a 20.3 percent share.