Over leverage on land hurts housing sector

Shortsightedness of banks and financial institutions fuelling over leverage for short term gain on land, coupled with government's faulty policy on housing sector and land management led housing sector from bad to worse.
According to the bankers, the current problem in housing sector is due to over leveraging on land as earlier housing and realty — especially on land buying and selling — were treated equally.
The banks were, for overnight profits, also over enthusiastic to lend heavily on realty assuming that the land prices will always look up but miscalculated on what if the borrowers failed to pay in the long run as the land prices will not continue to go up only.
Leverage is good in upward market, when an investor with his Rs 10 can borrow Rs 90 and take benefit of Rs 100. It is popularly said that 'good time better', but in the bad times, the leverage is worse as the investor's Rs 10 is not even enough to serve the interest.
In current situation, the average interest stands at around 15 per cent meaning the borrowers have already lost their equity and in negative net worth making them to wait for the good time that might come only after couple of decades. According to the central bank's study, the real estate is over priced by 30 per cent since last three years.
Similarly, the banks are also in loss as the borrower can even not serve the interest and it will be reflected in the banks' balance sheet as growing non-performing assets (NPA).
"Separating the land business and housing sector could be one of the best solutions as it has been proved a policy blunder that has made the genuine housing developers suffer," according to housing developers.
Sooner land-business and housing sector are separated, better it will be as the land plotting neither does add any value nor contributes to economy.
But the housing sector not only creates employment but also contributes to the economic growth as it requires ancillary industries like cement to bricks and electronics, sanitary and many more that create employment and contribute to the economy too. Majority of the Nepali migrant workers are in construction sector in the Gulf countries and Malaysia. They could be absorbed, if the government would promote organised urbanisation, as their income in Gulf countries and back home has no huge gap.
"The government is working out on how to incentivise the private sector to go to district headquarters for organised urbanisation," said Prime Minister's economic advisor and former finance secretary Rameshwor Prasad Khanal. "The government could develop basic facilities like road and electricity and encourage the housing entrepreneurs to go to districts."
The government and central bank's current move to rescue housing sector will only postpone the immediate problem — like last year — but not solve it, according to both realtors and bankers. "Neither the government nor the central bank is thinking any long term rescue package for housing and the banking sector, they said, adding that they are postponing the situation to get it much worse every time, since last year.
"The central bank has brought enough measures to rescue housing sector but they could not have expected impact as they were brought in a piecemeal basis," said Nepal Housing and Land Developers Association (NHLDA) vice president Om Rajbhandari, who is also the coordinator of Urban Development Forum under Federation of Nepalese Chambers of Commerce and Industry FNCCI).

Measures
* Home loan separated from realty loan
* Home loan base line that was fixed at Rs 6 million initially raised to Rs 8 million to be further raised to Rs 10 million
* Time frame for the banks to bring down their realty loan exposure to 25 per cent by 2011-12 has been extended to 2012-13
* Government planning to buy housing units for civil servants
* Foreigner can buy apartments
* Government planning to let the apartments be used as hotels