High property prices a risk to economy: BoN

THE central bank has raised concern over the surge in Namibian house prices, saying the effects of the high property prices will lead to higher inflation.

According to the First National Bank housing price index, the value of residential properties in Windhoek went up by 13,25 per cent and 18,72 per cent in 2005 and 2006 respectively. The Bank of Namibia (BoN) says given the low inflation rate during this period – at an average 2,2 per cent – the increase in property prices was way too high.”This state of affairs is of great concern especially to the central bank, because the surge in property prices could reduce the affordability of housing and filter through the price system and cause inflation, and thereby, compromise price stability,” the BoN noted in its latest quarterly bulletin.The BoN recently carried out a case study on the factors driving up house prices in Windhoek and the implications this has for the economy.The study showed that there was excess demand for housing and plots for either shelter, financial security, investment purposes or as a symbol of status.The affordability of credit was highlighted as another factor influencing the demand for housing in Namibia.The central bank ascribed affordability in this context to the low interest rate environment that the country has observed between 2003 and 2006.The bank rate, which was at 18,25 per cent in 1999, drastically reduced to nine per cent by end of last year.The case study also looked at other issues determining house prices in Namibia such as speculation, limited supply of serviced land, cost of building materials and marketing channels.The BoN said since housing loans accounted for about 46 per cent of the total bank portfolio in the country, such a scenario could cause instability in the banking sector, more so in the event of significant increases in the interest rate.The repo rate was last week hiked by 50 basis points to 10 per cent.”The excess increase in property prices could affect the borrower, the commercial banks and the economy at large.Given the ever rising property markets, borrowers might be encouraged to continue borrowing and ceding their properties as collateral.”While this is a welcome development, problems emerge when there is a surge in interest rates.The high interest rates may eventually lead to a large number of people defaulting on their loans, thereby resulting in a high level of indebtedness in the economy,” the BoN explained.The Bank of Namibia (BoN) says given the low inflation rate during this period – at an average 2,2 per cent – the increase in property prices was way too high.”This state of affairs is of great concern especially to the central bank, because the surge in property prices could reduce the affordability of housing and filter through the price system and cause inflation, and thereby, compromise price stability,” the BoN noted in its latest quarterly bulletin.The BoN recently carried out a case study on the factors driving up house prices in Windhoek and the implications this has for the economy.The study showed that there was excess demand for housing and plots for either shelter, financial security, investment purposes or as a symbol of status.The affordability of credit was highlighted as another factor influencing the demand for housing in Namibia.The central bank ascribed affordability in this context to the low interest rate environment that the country has observed between 2003 and 2006.The bank rate, which was at 18,25 per cent in 1999, drastically reduced to nine per cent by end of last year.The case study also looked at other issues determining house prices in Namibia such as speculation, limited supply of serviced land, cost of building materials and marketing channels.The BoN said since housing loans accounted for about 46 per cent of the total bank portfolio in the country, such a scenario could cause instability in the banking sector, more so in the event of significant increases in the interest rate.The repo rate was last week hiked by 50 basis points to 10 per cent.”The excess increase in property prices could affect the borrower, the commercial banks and the economy at large.Given the ever rising property markets, borrowers might be encouraged to continue borrowing and ceding their properties as collateral.”While this is a welcome development, problems emerge when there is a surge in interest rates.The high interest rates may eventually lead to a large number of people defaulting on their loans, thereby resulting in a high level of indebtedness in the economy,” the BoN explained.