The Effect of Tight Credit on the 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 the 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 the central bank has been following an extremely tight credit policy. This has severely reduced the credit available to the borrowers in the commercial real estate market as well as the housing industry. This is also confirmed by the consistent poor numbers reported on new home sale. Most developers have taken a wait and watch policy hoping that the bankers would change their policy shortly and 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 past 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 high quality individuals have been extended mortgage as banks have been 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, 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 that the central bank has put for itself and hence the economists have to make a very fine balance between growth and risk associated to 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 task cut out in determining the right amount of funds to be made available to the real estate sector. It is without a doubt that 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 has also not helped the industry and most analysts believe a tighter credit policy is better than a free for all as was witnessed in the real estate sector in the very recent past.