CB downplays domino effect in housing market from any trouble in luxury segment

The Central Bank this week said that even if one company in the luxury property market collapses, it would not have a knock-on, domino effect on the rest of the market and downplayed the possibility of an asset bubble in the property sector emanating from the luxury segment.

“The luxury developers seem to have been able to shift their properties pretty well up to now. So, up to now, I don’t see any reason why there should be any domino effect through the luxury property sector,” Central Bank Governor Dr. Indrajit Coomaraswamy said.

He was replying to a query by a journalist on whether a luxury property developer was collecting deposits on bookings from customers but failing to construct the property, on which he said that he had so far not heard of such a firm. He noted that there had initially been concerns on the high-end luxury apartment segment, where continuous supplies of residential units are slated to enter the market over the next two years. 

“As to whether there is a bubble, now if you look at the credit numbers, when you look at the exposure of the banking system to the real estate sector,

 

for the moment, there doesn’t seem to be a problem,” he said, noting that most transactions are taking place with cash.

Dr. Coomaraswamy also noted that although earlier there had been a belief that small and medium enterprises were using credit taken for working capital and other purposes were being used for speculative property purchases, there is scant evidence in this regard as well.

Central Bank Deputy Governor Dr. Nandalal Weerasinghe said that in terms of a company, which took deposits from customers to build an apartment complex but fails to follow through, customers would have to deal with the Condominium Management Authority, since the Central Bank, which observes from the perspective of the financial sector, more or less has no concerns.

He suggested that consumers could use tools such as escrow accounts to reduce the risks of companies not delivering on promises.

Dr. Weerasinghe said that 100 percent of the currently completed luxury properties are sold out, while 70 percent of the units in the luxury projects under development are reserved, booked or sold out, according to the information property developers provided to the Central Bank.

The governor meanwhile repeated the recently made statements that macroprudential measures will be brought in to ensure sustainable development in the housing sector and not to counter any asset bubble.

“There are things like loans-to-value, debt-servicing-to-income, etc. There are various macroprudential measures other countries have done, not because they think that there is overheating in that segment of the market but simply in order to ensure that growth in that sector is sustained and it’s not characterized by overheating. That is what we’re looking at,” he said.

Meanwhile, Dr. Coomaraswamy noted that some luxury property developers are now moving to the mid-range market, where they will be able to supply the unmet demand for housing, while the government will have to facilitate the development of the affordable housing segment.

“When you look at the affordable housing sector, there is clearly demand. There is more money that is required and the government is looking at ways and means of getting investments into that sector, ideally off balance sheet methods to get money into the affordable housing sector,” he said.