Amid increasing interest rates and housing prices, will land use policy help at all?

Post-Pandemic, the interest rate in the financial sector of Nepal has increased drastically. According to the report published by the Nepal Rastra Bank (NRB), commercial banks’ weighted average deposit rate was 7.41 percent and their weighted average loan rate was 11.62 percent which were 4.65 percent and 8.43 percent respectively in the year 2020/21. Inflationary pressures increased during the second half of the fiscal year 2021/2022 due to the rise in the price of fuel and food supplies, supply chain disruptions, and the depreciation of the Nepali rupee in relation to the US dollar. The annual average consumer price inflation (CPI) stood at 6.32 percent in 2021/22 compared to 3.60 percent in the fiscal year 2020/21. The rise in the inflation rate and other economic variables such as the depletion of foreign currency reserves and increase in imports prompted the central bank to increase the interest rate.

The tightening in the monetary policy adopted by the NRB to tame down the inflation rate has caused a rise in the interest rates. The increase in the interest rate in the economy under the circumstances (demand-pulled) indicates that there is excessive demand for credit as a result of which the NRB through banking and financial institutions (BFIs) promulgated the interest rate to increase. Increase in the interest rate decreases the demand for credit because borrowing gets expensive. Likewise, the central bank has tightened the credit flowing into the “unproductive sectors” which includes real estate sector, capital market, trading and retail sectors through its monetary policy.

The central bank’s effort to tame inflation by increasing the interest rate and controlling the credit flow into the real estate market has impacted the volume of the real estate transactions but with no any index or indicator it is difficult to change the price of the properties and the overall market. 

As a result of the tightened credit disbursement in the realty sector, the recovery in the sector has stalled. According to the report published by the department of land management and archive, the revenue collection has decelerated in the review month of mid-May to mid-June from Rs 4.78 billion to Rs 4.24 billion from Rs 4.78 billion in the previous month of mid-April to mid-May. This indicates the drop in volume of real estate transactions (buy/sell). However, with no indicators or index of the real estate sector in the present context in Nepal, it is difficult to identify whether the property prices have dropped or risen.

The “Housing and Utilities” accounts for the highest weightage of 20.30 percent in determining the CPI as of the 2021/22, according to the annual report published by the NRB. In contrast, the NRB’s effort to tame inflation by increasing the interest rate and controlling the credit flow into the real estate market has impacted the volume of the real estate transactions but with no any index or indicator, it is difficult to change the price of the properties and the overall market. Although the real estate market is sluggish with the decrease in the transaction volume as a result of tight liquidity in the financial system, with the recent land use policy introduced by the government the housing prices can be expected to increase. In contrast to the policy adopted by the NRB to tame down the inflation, the land use policy introduced by the Ministry of the Land Management, Cooperatives and Poverty Alleviation, which includes the mandatory classification of lands or zoning of the lands before any trade (buy/sell), will limit the supply of the residential and commercial properties as it bars construction of buildings and houses in the agricultural and other zones.

The Land Use Regulation (2022), introduced by the Ministry of Land Management, Cooperatives and Poverty Alleviation, includes the mandatory classification of lands for making any trades (buy/sell). The land has been classified into 10 zones–agricultural, residential, commercial, industrial, mines and mineral zone, forest zone, public use and open space zone, cultural and archaeological zone, importance and others.

The federal, provincial, and local governments in Nepal are required by law to create independent land use plans, with the provincial plan being in alignment with the federal plan and the local plan with the provincial plan. The local government is in charge of land mapping and developing the land use plan based on economic and behavioral characteristics, but the federal government has kept its authority to often intervene on the grounds that local governments lack the necessary ability. The overall situation raises serious doubts about the effective use and allocation of land for designated objectives. The Ministry has directed the local level government to categorize the lands into agricultural and non-agricultural land by December 09, 2022.

Land authorities have challenging issues in governing residential development and the housing market effectively. Ideally, high land regulations reduce the quantity of land that can be built on, skewing building toward less dense neighborhoods and larger, more expensive housing. The political mechanisms through which municipal planning and zoning decisions are determined can become more expensive as a result of the dominance of insiders and people with influential power and with higher incomes. The land characteristic and the final housing product may become more expensive when local authorities successfully remove land from buildable supplies—under the name of “zoning,” “growth management,” or other restriction (Quigley & Rosenthal, 2005). 

Housing price increases have been linked to restrictions on development, stricter zoning limits on permitted density, urban growth limitations, and delayed permit processing times. With this policy in implementation, this will supposedly put an end to rapid plotting and housing projects nationwide. However, the prices of the residential, commercial properties may continue to rise due to the limitations and restrictions from the zoning or the land use policy as it would limit the supply of such properties.

Mandil Munankarmi works as a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. 

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