deepak mohanty : perspectives on housing finance in india remarks by mr deepak mohanty, executive director of the reserve bank of india, at the international conference on “ housing : an engine for inclusive growth ”, organised by the national housing bank, new delhi, 12 april 2013. * * * the assistance provided by a. b. chakraborty, ravi shankar, abhiman das and binod b. bhoi is acknowledged. i thank mr r. v. verma, chairman and managing director, national housing bank ( nhb ) for the opportunity to be a part of this distinguished panel on “ housing finance post sub - prime ”. housing is a basic necessity. yet a large number of households do not have access to decent housing, particularly in a developing country like ours. in view of the importance of housing, a key element of public policy in many countries has been to encourage house ownership largely through fiscal incentives and better availability of housing finance. at the same time, the demand for housing finance has encouraged financial innovations, at times resulting in financial crisis like the recent one. while development of housing finance in advanced countries has a long history, the expansion of housing finance by the formal financial sector in india is of relatively a recent origin. keeping in view the demand - supply gap, our favourable demography, increasing urbanisation and better growth prospects, the demand for housing finance will continue to grow. the challenge, therefore, is expansion of housing finance to a wider section of the population with the necessary safeguards to preserve financial stability. against this background, i will touch upon the sub - prime crisis in the us with the objective of distilling the lessons that can be drawn for the development of housing finance. i will then dwell upon the developments in housing finance in india with a particular reference to banks. i will also discuss the initiatives taken by the nhb and the reserve bank to develop the statistics on housing finance, particularly house price indices. i will conclude with some thoughts on developing housing finance on the way forward. sub - prime lessons globally, developments in housing markets and house prices have drawn considerable attention in both academic and policy circles in the aftermath of the global financial crisis. the recent global crisis emanated from the sub - prime segment of the us housing market. while the crisis has spread and become broad - based across the globe, the post - crisis recovery has also been predicated on the prospects of the housing sector in many advanced economies. as emphasized

in the literature, there are different channels through which housing affects the economy : first, housing wealth constitutes a significant portion of total wealth of households in the advanced economies. for instance, housing wealth accounted for about one - half of household net worth in the us and over two - thirds in the euro area. hence, any variation in it may have significant impact on households ’ consumption and thereby aggregate demand in the economy. second, housing markets have implications for the supply side of the economy as labour mobility and employment is affected by the housing economy. third, house prices, like any other asset prices being interest rate sensitive, affect transmission of monetary policy. finally, boom and bust in house prices have implications for business cycles and hence financial stability. historically, sharp increases in house prices have been followed by sharp declines after the price bubble bursts. reinhart and rogoff ( 2009 ) show that the six major historical episodes of banking crises in the advanced economies since the mid - 1970s were all associated with a bis central bankers ’ speeches housing bust. 1 in the decade preceding the sub - prime crisis, not only did the house price increased substantially, it was also more synchronous across the advanced economies ( chart 1 ). thus, sharp increases in house prices over a prolonged period are often predictive of crises in the future. moreover, the run - up in property prices was also associated with large expansion in credit leading to a substantial increase in household debt. according to the international monetary fund ( imf ), in the advanced economies, the ratio of household debt to income rose by an average of 39 percentage points to 138 per cent during the 5 - year period preceding 2007. 2 cecchetti ( 2012 ) 3 argues that booms in the prices of assets used as collateral create procyclicality and property price booms tend to be much worse than equity price booms. the institutional structure for housing finance and the role of government differ across countries. it is argued that the key determinants of market depth of housing finance in advanced economies are greater acceptability of housing as collateral and well defined legal rights of borrowers and lenders. the mortgage loans are typically long - term, 20 – 30 years. but, mortgage interest rates in most cases tend to be linked to short term rates with the provision for periodic resets. there are exceptions, however, such as the us, where longterm fixed - rate mortgage even for 30 years is available. loan to value ratios (