The slowdown in property price gains in Sri Lanka’s capital Colombo (disinflation) had ended with a near double digit annual gain, according to an index compiled by the country’s Central Bank.
Land, residential and commercial property prices inflated a little under 20 percent in 2018 amid a strong economy recovery where pro-cyclical liquidity injections to target an output gap triggered a currency crisis and a credit slowdown.
In 2018 the economy was recovering from an earlier currency crisis in 2015/2018, which also led to a bust after liquidity injections triggered a currency crisis.
The price gains fell to low single digit amid a credit slowdown.
Sri Lanka in 2020 started injecting large volumes of money, triggering record balance of payments deficits, and interest rates were brought down to mid single digits.
When interest rates fall, the present value of long term assets come down (asset price bubble) and the opposite will happen when rates rise, but a currency fall can also push up prices on an absolute basis denominated in domestic currency.
“Land Valuation Indicator (LVI) for Colombo District increased to 155.1 during the first half of 2021,” the Central Bank said.
“The annual increase of 9.5 and the semi-annual increase of 6.8 of LVI, reversed the declining trend observed in the LVI increases over the last two years.”
“All sub-indicators of LVI, namely Residential LVI, Commercial LVI and Industrial LVI, contributed to the overall increase. Industrial LVI recorded the highest annual increase of 10.1 per cent, followed by Residential LVI and Commercial LVI.”
The Land Price Index (LPI) compiled from 1998 to 2008 on an annual basis and from 2009 to 2017 on a semi-annual basis, covering 5 DS divisions in the Colombo District. Subsequently, from 2017 onwards, its geographical coverage was enhanced to represent all 13 DS divisions in the Colombo District and hence it was rebased considering 1st half of 2017 as the base period. From 2020 onwards LPI was renamed as Land Valuation Indicator (LVI) and continued to be released on a semi-annual basis.
Per perch bare land prices are obtained from the Government Valuation Department on a semi-annual basis.
Considering the diverse nature of land use, and the necessity of maintaining homogeneity, three sub-indicators for residential, commercial and industrial lands are computed separately for each DS division using the average per perch bare land price in the area. The LVI is the simple average of these three sub-indicators.