Central bank wary of "asset price bubble"

MBONGENI MGUNI
Staff Writer | Tuesday June 21, 2011 00:00

 

The Deputy Director of General Economics and Statistics, Matthew Wright, told Business Today that the central bank was looking for 'systematic' information on housing prices, the most relevant area of study for Botswana in terms of asset price threats. 'The formal housing market is increasingly important, as well as increased household borrowings, and we want to monitor it more systematically,' Wright said at a briefing last week. 'This is because for countries that were affected by the global financial crisis, large problems developed in their housing markets.'

BoB figures indicate that by March, households owed P13.08 billion in credit to commercial banks with property loans amounting to more than a quarter of totals outstanding.

Of extensions by banks, credit growth rose most rapidly for property loans, climbing by 28 percent between 2009 and 2010, followed by personal loans, which rose by 10 percent. Credit expansion decelerated in motor vehicle loans, pointing to more loan settlement than new credit extension. Observers believe the sharper credit growth in property loans reflects not only increasingly uptake, but also rising property values, particularly in urban areas such as Gaborone where property rates are burgeoning. Analysts believe that while the supply/demand gap favours the prevailing higher residential and commercial property prices, the increasing availability and flexibility of mortgage products is also underpinning higher rates in the market.

For the central bank, 'systematic' information will enable experts to understand whether the asset price bubble is about to burst.  Said Deputy Governor, Moses Pelaelo: 'The problem would be to the extent that people are defaulting in the banking system. It would be important to look at this leverage ratio.'  Most worrying for the central bank is that of the P1.5 billion in arrears to commercial banks as at March 2011, nearly 84 percent was attributable to households. Added to the fact that household debt accounted for nearly 58 percent of total credit extensions by commercial banks, fears abound that higher defaults could cause ripples in local banking.

The global financial crisis was triggered by an asset price burst in the United States known as the sub-prime housing crisis. Years of lax credit in mortgages crashed owing to loss of investor confidence despite desperate measures by the US Fed to pump funds into the market.

The crisis spread across banking systems in developed countries, with governments rushing to and mostly failing to holding up financial systems as panic spread.