Some lessons from the US and Spain

Abstract

The Real Estate Regulation and Development Bill (RERD), recently cleared by the Cabinet, is a milestone and is expected to usher an era of professionalism and transparency in the housing sector. Housing is an important sector accounting for nearly 8% of total banking credit or about 4% of GDP as of March 2012 and, therefore, has also to be a concern for RBI, especially when house prices rise rapidly. Asset prices are very important for monetary policy because when bubbles, big or small, burst, the cleaning up of the mess is a long and unhappy experience. Spain and the US are classic examples where the crisis erupted from the housing sector and economic recovery continues to be sluggish even after 6 years of the beginning of correction. In the US, housing markets, though recovering, continue to be weak, and are expected to be subdued over the medium term. The delinquency rate in the US, directly impacting the banks, continued to be above 10% in Q4 2012. In Spain, house prices rose by nearly 200% between 1996 and 2007 and the mortgage debt-to-GDP ratio doubled from 30% in 2001 to 61% in 2007. In a country with about 17 million families and 23 million houses, the housing bubble was waiting to burst as nearly 25% of the houses were unoccupied. Consequently, home prices had a free fall, declining by more than 26% in first three years, and according to IMF were expected to decline further. IMF (2013) explains the weak tail of firms due to construction and seeks greater vigilance of bank asset quality by supervisors as banks are holding hard-to-value real estate assets. In the US, probably because of a well-developed housing sector, the economy has been able to withstand the shock of a great recession. But not Spain. Read more at: https://www.financialexpress.com/archive/some-lessons-from-the-us-and-spain/1128258/