TAKE THAT!

RBI Governor Raghuram Rajan surprised everyone by cutting the repo rate by 50 basis points to 6.75%. But will it revive the real estate sector? No, only lower home prices will.

There is hardly anyone who isn’t a fan of the RBI Governor. “I don’t know what you want to call me, Santa Claus or hawk. My name is Raghuram Rajan and I do what I do,” he told the media. In true Rowdy Rathore style, Rajan put it bluntly that he was front-loading and it was now up to the banks, the Government and the businesses to show that this is what was holding them back. It was in August when he gave a clear message to those demanding interest rate cut as if the whole economy depended on it. "It would be a great help if realty developers sitting on unsold stock bring down prices. Once the prices stabilise, more people will be keen to buy houses," he said. The RBI Governor added that property prices needed to fall before interest rates on home loans came down any further. "I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don't want to create a situation where prices stay high at the level which means demand can't pick up," he said. Rajan was very vocal all through these days about the dangers of unwarranted rate cuts.

It is a myth that lower home loan rates will spur sales. A 50 point cut means a couple of thousand rupees reduction in monthly EMI for a loan of about 50 lakh for 20 years. Whereas a reduction of Rs 10 lakh in the price of a 1.5 crore 3BHK will save more in EMI expense than a measly 0.50%. Why is it so difficult for the Finance Minister and his learned colleagues to understand the simple rationale that it’s the unaffordability factor that is stalling the so-called growth in the realty sector? Needless to say these rate cuts are not translating on ground with poor transmission by banks in terms of reducing borrowing rates, while simultaneously reducing deposit rates to bolster their profits. The effects of these rate cuts are mostly felt in bonds, debentures and commercial paper market where the corporates are the leading borrowers. Let’s give it to the RBI Governor for a thought-provoking analysis of the housing sector and housing finance in Indian context. He is right in saying that property prices must also go down. But our debt-laden developers say there’s no way they can go down from where they are right now. Of course, reduction in real estate prices will never happen, because the developers will inform you that 'input costs' have gone up. With the result we see thousands of houses/flats lying unsold and unoccupied, which is not a productive creation of assets at national level. Genuine buyers who take home loans, borrow money from family and friends and use all their lifetime savings can’t afford to keep invested in properties that are never delivered. In this context the unsold/unoccupied inventories in the housing sector are akin to hoarding of capital goods not good for the economy as a whole. The real problem is no one actually wants to get to the root of the malaise as it is too ugly and will involve a lot of effort too. The developers, of course, are welcoming the move and requesting the banks to pass on the benefits to homebuyers in form of reduced home loans. The banks, of course, aren’t willing to go below 9.3%,   which is what State Bank of India is now offering after cutting base rate by 40 basis points making it lowest in the country.