Tight credit’s effect on real estate sector

The growth and development of the real estate sector is largely determined by the monetary policy of the central bank. A tight credit policy squeezes the flow of credit available to the banking sector, and the result is that banks reduce the amount of lending to the real estate sector.

An easy credit policy, on the other hand, infuses liquidity into the banking systems, thus making them more amenable to pass the credit to the borrowers. Data released by the central bank over the past few months establishes that it has been following an extremely tight credit policy. This has severely reduced the credit available to borrowers in the commercial real estate market, as well as in the housing industry. The consistently poor numbers reported on new home sales also confirms this.

Most developers have taken a wait and watch stance, hoping that the bankers would change their policy shortly; they have not even completed the projects they have on hand. This has also reduced the supply of new homes and has resulted in stabilization of home prices, which had been consistently declining over the last few months.

One of the big consequences of the sub-prime crisis and rising job losses has been that apart from reduced funds available for lending, banks have also made their mortgage lending norms stringent. Only worthy and highly qualified individuals have been extended mortgages, as banks have become extremely cautious about the quality of borrowers. Banks have been approving home loans only to individuals with good credit worthiness, as reflected by a healthy credit score. The banks have been compelled to take these strict measures because of the various steps taken by the central bank in the aftermath of the collapse of a few big names in the financial world and the housing industry.

As a result of reduced credit, the sector has seen times of low activity. Sales have been depressed and projects have been stalled, and the pace at which the running projects have been moving has been quite slow. This further impacts the growth targets the central bank has set; hence, economists have to strike a very fine balance between growth and risk associated with easier credit. Easy credit has its own problems in the form of inflationary pressures and the rising asset prices, which reflect a bubble waiting to burst.

Most economists believe that the tight credit policy is here to stay until the end of 2010. Meanwhile banks have their tasks cut out in determining the right amount of funds to be made available to the real estate sector. Without a doubt the real estate sector has to bear the brunt of a tight policy followed by the bankers. The massive rise in the number of foreclosures also has not helped the industry.

Still, most analysts believe a tighter credit policy is better than a free-for-all, as witnessed in the real estate sector in the very recent past.

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