The governments recent stimulus package and the Reserve Bank of Indias (RBI) interest rate cuts have once again raised hopes that buying a house would become feasible. But while banks have complied and brought down their home loan rates,the response from developers,in the form of price cuts,has not been forthcoming.
According to Asha Lata,a Delhi resident,who presently lives in a rented flat and plans to buy one soon,After the announcement of the two stimulus packages by the government,I thought it would become easier to buy a flat in the National Capital Region (NCR). Several builders have announced price cuts in newspaper advertisements. But when I went to the booking office of Gardenia Square in Indrapuram,I found that they were asking for additional amounts for finishing the flats and for parking space. Together these charges amounted to an additional Rs 6 lakh over and above the advertised rate of Rs 32 lakh. Like Asha Lata,thousands of potential buyers across the country are discovering that the price cuts being announced by developers are mere fiction.
There are two reasons why despite lower home loan rates,the housing market has failed to revive. One,due to the slowing economy,buyers are not sure about their cash flows,and hence dont want to take on the burden of a home loan. And two,property prices have not fallen sufficiently to buy a flat.
To a large extent,bankers are ready to do what they can to ameliorate the pains of buyers in the real estate sector. T.S. Narayanasami,CMD of Bank of India and chairman of Indian Banks Association,explains that they are set to support the real estate sector as per the directives of the RBI to relax provisioning requirements. We are more considerate when clients from this segment come over for a roll-over of their credit lines, he says.
However,he adds: We have expressed our view to the government that the home loan package is yet to take off primarily due to high property prices.
BUT STILL WARY
The RBI has also reduced the capital adequacy requirement for bank advances to the real estate sector. Some time back,banks were barely lending to the real estate because of risk and exposure limits. Due to the RBIs insistence,we are ready to lend, says M.V. Nair,CMD of Union Bank of India.
While credit supply has loosened to some degree,banks also wish to be prudent. If we take note of the government,then we may have to end up worrying about NPAs (non-performing assets), says a banker.
While urging banks to lend more to housing,the RBI has at the same time signaled that banks should move cautiously. Though the government has been insisting that banks be lenient towards real estate and other sectors,the RBI has always cautioned banks,asking them to price risk suitably and make certain that only quality enterprises get funding, adds the banker.
HOME LOAN RATE CUTS
All public sector banks have announced special home loan packages,which will remain fixed for the next five years. In the wake of public sector banks cutting their benchmark prime lending rates (BPLR) and home loan rates,private banks have also announced rate cuts. ICICI Bank has announced a 50 basis points cut in its floating reference rate (FRR) for home loans,bringing it down from 14.25 per cent to 13.75 per cent. This cut will apply to all existing and new home loan borrowers. Following the cut,its floating rate for home loans above Rs 20 lakh is 12.5 per cent and for loans up to Rs 20 lakh is 11 per cent.
Reduction in repo,reverse repo,and cash reserve ratio (CRR),which is likely to enhance liquidity in the system,will make lending to home buyers and developers easier and less expensive. However,developers believe that the governments moves have not met the basic needs of the sector. Says Kumar Gera,chairman,CREDAI (Confederation of Real Estate Developers Associations of India): Rate cuts will definitely have a positive impact on demand for homes. The RBIs moves have eased liquidity in the system,but credit flow to developers still remains an issue. Moreover,developers have been demanding that the cap of Rs 20 lakh (which qualifies for concessional interest rates) should be raised to Rs 30 lakh,helping maximum consumers to enjoy the benefits.
PLEADING NOT GUILTY
At present,at most places,builders are holding on to their prices,even at the cost of sacrificing sales. Speaking from builders point of view, Sanjeev Srivastava,MD of Assotech,a Noida-based developer,says: In places where selling price of primary property was just above the sum total of input costs (land,development,marketing,labor,wages,etc),there has been no reduction in price. However,in those areas where properties were launched at quite high prices as compared to market absorption price,we saw reduction in prices. Let us not forget that any sale below the sum total of input costs would make a project unviable,which is good neither for the developer nor for the buyer.
Gera,on his part,counters the perception that prices have not come down. Real estate values across India have softened by varying degrees ranging from 5 to 25 per cent from the highs of 2007. Cutting to the heart of the issue,he adds: Buyers realise that prices can soften only to the extent that input costs soften. Major input costs in real estate are cost of land,construction material,labour,government clearances and approvals,finance costs,plus soft costs of design and marketing. To what extent these costs have come down and to what extent they can come down further is the crux of the issue.
While the government and RBI,on their part,have ensured that loan rates are reduced and more credit flows to the sector,developers too need to respond with reduced prices so that consumers can buy the inventories that have piled up. Until developers do so,the stalemate will continue and demand will not pick up. The sector needs advance systematic assessment benchmarks that all stakeholders can make use of and supervision procedure to ensure speculation does not become major motivating force of its growth, says an analyst.
Lower home loan rate is part of the solution. Builders must be objective on the price front,if they have to exhaust the pile-up of 1.5 million unsold flats. l