RBI flags high home prices

General impression is that high prices being quoted by builders stem purely from a profit motive.

Written by ENS Economic Bureau | Published: June 29, 2013 3:38 am

The Reserve Bank of India (RBI) in its Financial Stability Report for June,released on Friday,has flagged the rising house prices in most metros. This is at variance with bank credit to housing,which has actually fallen. “Growth of bank credit to this sector has,however,been moderate. Further,the share of credit to the housing sector fell to 9.5 per cent as at end March 2013 from 13.3 per cent at end April 2007,” the RBI said.

In parts of Mumbai,for example,the central bank says that there are indications that the price to annual rent ratios are as high as 50. “There is a need to closely monitor this sector,” the central bank said.

Last week,the head of a housing finance company too touched upon the high home prices in his message to shareholders. In HDFC’s 36th Annual Report,chairman Deepak Parekh observed,“Even in tier II and tier III cities,home prices are inflated.”

The NHB Residex,an index that monitors house prices in key cities has in its latest instalment pointed to this trend.

For the quarter ended March 31,house prices in 12 cities have shown an increase over the previous quarter. The Residex monitors 20 cities. The maximum increase was observed in Jaipur (28.74 per cent) followed by Bhubaneswar (14.54 per cent),followed by Pune (7.81 per cent) and Bhopal (6.49 per cent). Other cities too witnessed a marginal rise,such as Patna (0.67 per cent),Ahmedabad (0.53 per cent) and Indore (0.52 per cent).

Parekh has advocated increasing supply as the only way to reduce prices and called upon developers to cut prices. “Ultimately,developers need to recognise that in the long-run,it is to their advantage to allow a correction in prices,” Parekh said.

This view has been countered by the real estate industry. “In my opinion,there is enough supply in the market in all segments. Increase in supply is not the solution to the problem. In fact,high supply will worsen the situation further,” said Navin Raheja,president,National Real Estate Development Council (Naredco).

“Reducing prices could significantly impact sentiments in the market place. It might create panic situation in the market,” said Nishant Singhal,director-strategy,Investors Clinic Infratech,a property brokerage.

Instead developers have been attracting buyers by offering payment schemes such as 20:80 schemes and interest subvention schemes. Parekh cautions against such “teaser” offers. “To my mind,teaser products of any nature entail risks. Customers need to be cautious of ‘too-good-to-be-true’ type of products. Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower’s loan for a specified period.”

In fact,such schemes are also on the radar of the National Housing Bank (NHB),the regulator for housing finance companies. “We are keeping a close watch on such schemes. We aim to ensure that developers do not derive undue regulatory arbitrage if lenders unknowingly or unwittingly club individual retail loans to the project loan,” said RV Verma,chairman and managing director,NHB.

Raheja pegs the increased prices on the very nature of the business with high capital costs,which escalate as approvals from various authorities take up significant period of time. Anuj Puri,chairman and country head,Jones Lang LaSalle India agrees with this view.

“The ground realities of the development business also need to be factored in. The general impression is that the high prices being quoted by builders stem purely from a profit motive. However,it is not commonly understood that builders have also been paying a lot more for developing their projects. To begin with,obtaining the 57-odd permissions for construction of a project can take as much as two years,” said Puri.

A major cost is the purchase of land,which can work out to a substantial portion of the total project cost in metro areas. Currently,developers have to resort to private financing to cover the purchase of land. The RBI has given a ‘high risk’ weight to land purchase and banks do not offer financing. The move is essentially aimed at preventing asset bubbles,which were the prime reason for the 2008 financial crisis.

Verma,however,calls for a relook into the business model that is prevalent today in the real estate sector. “Developers resort to costly financing to purchase land. It is time to take a relook at land purchase. Bringing in a special regulatory treatment for residential projects would be most favourable. If there is a mechanism for part financing of land,the lender can monitor the project from day one,which can help mitigate risk and bring in better affordability.”

The high land costs have become a major impediment to the growth of affordable housing,the sunrise sector,as Parekh observed.

“In most states,the floor area ratio (FAR),density and ground coverage norms do not support creation of affordable housing. The long approval process is another major problem. In the cities where land cost is high,this is possible only under public-private partnership. Upward revision in FAR,ground coverage and population density norms are required on priority basis,” said Raheja.

While industry players pin the rising prices on extraneous factors,the RBI has plans to monitor the sector closely by developing a set of indicators. “Indicators such as house price to household disposable income ratio,household financial obligations to household disposable income ratio,land price indices,index of construction costs,and price to rent ratio,information on ownership of houses,among other indicators need to be developed,” the RBI said.

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