Home makers

The announcement that home loans of below Rs 20 lakh 8212; which form the bulk of housing loans 8212; will now be available at a rate of 9.5 per cent for a period of five years will be music to many borrowers8217; ears. This should relieve the pain of many middle-class households struggling under the impact of the financial crisis. Also, if a large number of new borrowers take loans under this category this can work as a stimulus for the housing and real estate market. Now that the government has offered this stimulus it is important for real estate developers to also do their bit and reduce house prices.

A reduction in house prices is necessary for the correction in the market to be complete and for homes to become affordable for the large number of people who aspire to own homes. High prices led to a sharp supply response in the housing market. The profit margins of developers were at extremely high levels as the cost of construction was not in proportion with house prices. After the kicking in of the supply response, it is normal for prices to come down. But even with the lower level of demand the correction in prices is not entirely complete. One element of concern borrowers may have with a fixed 9.5 per cent rate is that as the slowdown continues in the coming months, interest rates in the economy will decline. If things get really bad, of which there is a strong possibility, the rates may fall below 9.5 per cent and borrowers may then want to move to a floating rate. Details of the package should ensure that they are able to do so, otherwise in the midst of a slowdown they will be stuck with a high interest loan.

Also, if the government wants banks to give loans at rates lower than what it costs them, there should be a clear on-budget subsidy. It will be incorrect to expect banks to bear the costs. The last thing we need is distress in the banking system. At least until now this sector has been safe. Policy requires that rather than merely targeting one sector or the other there should be a movement towards lower interest rates for all borrowers. Investment in industry, infrastructure, working capital, trade credit and credit to SMEs are equally important drivers of the growth in the Indian economy and should on no count be adversely affected by policies for banking and finance.