RBI's monetary policy bad for real estate: ASSOCHAM

Business Desk

The Reserve Bank of India (RBI) should immediately review its monetary policy to remove its excessive focus on taming inflation only and also concentrate to reduce mortgage rate, besides take measures to curtail interest rates to enable wage earners to afford dwelling units.

Above observations are contained at Real Estate paper brought by the ASSOCHAM vis a vis RBI Monetary Policy which states that premier bank has been framing its credit policy with over focus on containing inflation. It is totally ignoring tight credit policy’s consequences on real estate as the bank has not given any thought in reducing interest and mortgage rates and thus the policy is proving to be inimical to real estate growth.

The increase in interest rates and those of mortgage rates, the demand for properties have been eliminated as their prices have gone up beyond affordable limits. Although, the demand for property purchases was very much there but today affordability has come into question, says the paper.

Releasing it, the ASSOCHAM President, Mr. Sajjan Jindal sought that the government should get out of the business of infrastructure building and leave it entirely to private sector to spur up growth in property businesses just as it played a role of facilitator in telecommunication about couple of years ago.

Further unveiling its findings, the paper says that even as default rates on installment payment of home loans have risen around 8%. Indian real estate market which is estimated at US$ 14 billion currently is likely to be US$ 90 billion by 2015 as demand for both commercial and residential property is surpassing supplies.

Mr. Jindal, however, pointed out that the paper projects that since the real estate sector is growing at 30% rate and the demand will continue to surpass supplies even in near future, it is estimated that US$ 12 billion worth of investment is expected to flow into the sector by end of the year 2009.

The paper further points out that lucrative returns ranging from 20 to 25 per cent coupled with cheap and easy availability of funds have seen people from all walks of life investing in the Indian realty. Furthermore, improving institutional framework and fiscal benefits have encouraged more and more players to enter the market. The list of investors includes High Net Worth Individuals, Non Resident Indians, Financial Institutions, Private Equity Funds and Retail Investors.

Housing which constitutes almost 80 per cent of the Indian real estate development has witnessed a huge demand, which is set to multiply further. As per the Global Report on Human Settlement 2005 - ‘Housing crisis in the making’, 40 per cent of the Indian population will require proper housing and basic infrastructure by 2030.

Home loans formed nearly 12 per cent of the total outstanding credit of scheduled commercial banks way back in March 2005, up from just 2.4 per cent in Mar 1990. The sales value of housing construction has witnessed an exceptional leap from Rs. 17.61 crore in 1991 to Rs. 5000 crore in the year 2006. This goes to prove that lower interest rate regime had played a pivotal role in increasing the credit outflows towards the reality sector as also demand .

The rising home loan rates, resulting from Reserve Bank’s measures to control overheating in the real estate market, have severely impacted the genuine buyers, according to the ASSOCHAM paper. It has also found that the interest payout on housing loans has amplified tremendously with the sharp rise in home loan rates. The annual additional burden on an average on reality home loan interest have gone up by approx. to Rs. 50,000 annual on a single individual.

The home buyers have received double blow with rise of more than 400 basis points since January 2006 and property prices mounting by 50-100 per cent in most of the locations. The eligibility of the borrowers has come down by roughly 30 per cent since the hike in interest rates had begun long back and its pinch is now increasingly being felt.

The speculative purchasing activity in the housing markets has come down as the funds have become dearer. This is evident by a drop of 60 per cent in the sales in re-sale market of Mumbai, Delhi, Kolkata and Bangalore as compared to 35-40 per cent rise in May 2006.

“While the speculative activity leading to overvaluation in the real estates market is not desirable, it is equally important that the genuine buyers do not get hurt in a move to curb speculation”, said ASSOCHAM President.

The growth in the home loans have been severely affected due to rise in cost of funds. The growth rates of housing loans had come down to 29.1% in FY2005-06 and 26.6% in FY2006-07and about 20% in 2007-08 as compared to 73.9% and 48.6% in FY05, FY04 and FY03. The ASSOCHAM paper has forecast that the growth in home loans may slow to 15-17 per cent in the financial year 2008-09.

The home loan to GDP ratio in India is just above 5 per cent, which is significantly lower than the developed markets of the US and the UK, where it is more than 50 per cent.

ASSOCHAM has recommended to the government to repeal the Urban Land (Ceiling & regulation) Act, 1976. The Act imposed a ceiling on the quantum of vacant land that any individual can possess in urban areas, with a view to prevent concentration of urban land in few hand, speculation and profiteering from it. The Act is applicable in states of Andhra Pradesh, Assam, Bihar, Maharashtra, Jharkhand and West Bengal.

Another major recommendation of the ASSOCHAM is the rescinding of the rent Control Act which would be instrumental in meeting the growing need for housing. The Rent Control Act which put restriction on the upward movement of rental values in accordance with market dynamics has led to withdrawal of existing housing stock from the rental market and stagnation of municipal property tax revenue.