INRnews - Indian Real Estate News

However, the study suggests that housing prices are significantly much more sensitive to permanent interest rate shocks than shocks to credit growth. The stance of monetary policy particularly that reflected by the setting of the policy rate appears to be the single most important arbiter of the future growth of the housing market. "There is a need to carefully evaluate consequences of monetary policy actions, specially when the housing market is seized by price bubbles. Raising interest rates more than what is required for overall price stability purposes may prove to be counterproductive," according to the paper.

While interest rate and credit growth have a significant bearing on housing prices, however, real income growth played only a minor role in determining housing prices. Prices are significantly much more sensitive to interest rate changes than credit supply.

Monetary policy is expected to exert a significant impact on the housing market as monetary conditions undergo changes either in the form of a rise in interest rates or a reduction in supply of credit. Since changing monetary conditions especially interest rate, have particularly large impact on housing prices, it is necessary that measured policy adjustments are taken to avoid adverse effects on the balance sheet of banks, particularly of those having large exposures to the housing/real estate sector.

To read the full paper, select the link below:
Identifying Asset Price Bubbles in the Housing Market in India