Home, cheap home

The worldwide finance-driven slowdown that India is beginning to feel the pinch of originated in the American housing sector. This is something we all know. We sometimes ignore, however, the other truth: that there is something special about the housing sector that makes it particularly sensitive. Which is why the package making home loans more accessible 8212; announced by the Indian Banks8217; Association 8212; the implementation of which has now begun by state-owned banks, is welcome. And it is also why it can only be a first step. The package is insufficient to meet the economy8217;s needs. While it might, if we are fortunate, prop up some neighbourhoods and re-introduce some optimism in a market dependent on sentiment, it will not help the beleaguered middle class sufficiently.

For one, it only helps new borrowers. Those who, tomorrow, wish to take out loans with a face value of less than Rs 5 lakh will be able to take them out at an interest rate of 8.5 per cent; loans between Rs 5 lakh and Rs 20 lakh will be available at 9.25 per cent. This will not extend, however, to those who took those loans out a few months or years ago at adjustable, or variable, rates: they will still be stuck with the twin troubles of high interest payments and falling prices. It therefore can hardly be said to have eased the EMI burden of the middle class.

Whether it will aid the recovery of the real estate industry, and preserve and protect fragile neighbourhoods, is still an open question. There is little doubt that India8217;s great, rapidly growing metropolitan cities are unlikely to directly benefit: few new houses are being built that fit into the sub-20 lakh price range. Absent good public transport, and given restrictive zoning regulations and red tape, it is unlikely that any will be built. For those in the industry hoping to save their big-ticket projects in metropolitan areas, this is bad news. But it is good news for smaller towns across India, and for newer neighbourhoods populated by first-time buyers and retirees. These are the neighbourhoods put at risk by contagion 8212; when the distress sale of a subset of houses leads to a rapid fall in prices and a consequent downward spiral of decay and declining values. It is possible that focussing demand and policy attention on this segment, these neighbourhoods, will act as a circuit breaker to that process. But, in the end, the question is whether increasingly urbanised, home-owning India is being looked out for by policy: and this recent reduction doesn8217;t answer that well enough.