Amongst the measures taken by the Reserve Bank of India in
recent weeks, a special importance has been placed on the real estate sector as
an engine of economic recovery. Concessions have been given on the interest charged
on home loans below Rs 20 Lakhs and repayment terms made more liberal fordevelopers who had borrowed from banks.
The price initiatives and regulatory
forbearance have evoked a market response; some banks have recently lowered itsinterest rates on new home loans. This should be welcome news to policymakers,
who will be keenly watching for signs that the stimulus measures are
translating into lower costs for borrowers and, consequently, greater incentives
to spend. On the evidence so far, however, these steps have not improved the scaleof transactions in the real estate market.
Most buyers continue to hold back inthe hope of further drops in prices, while developers find that financial
succors give them the power to withhold price cuts. The result may, therefore,
prove to be the opposite of what was intended, by delaying the price adjustment
that is essential if demand and supply are to balance once again. Thecontinuing uncertainties in the job market would also be holding back potentialbuyers, who would not like to make substantial long-term payment commitments.
A revival in the real estate market is, therefore, linked toconfidence spreading that the worst of the downturn is over. Also, new homes
are bought on trust; the buyer pays the seller for a promise of future delivery.
The market depends heavily, therefore, on the credibility of the seller. Even
with low borrowing costs, buyers will be wary of making commitments to sellers whoshow signs of not being able to live up to their commitments.
Unitech, a
prominent Delhi-based developer, has been trying to raise large amounts of cash
to keep its operations going, even as its share price tumbles. And IFCI, to whom
Unitech had pledged shares against a loan, decided to sell the shares because
falling prices were eroding their collateral value. As the uncertainty about
its ability to complete projects due to funding constraints increases, people
will be even less willing to either buy from it or lend to it. Similar stories
are being played out across the sector with small and large developers. The prospectsof the market reviving in these conditions are grim.
There is a clear need for further selective intervention.
Projects that are close to completion should be encouraged with funding. Some
of the funds being raised through special purpose vehicles like IIFC could be
made available to developers who qualify on this basis. Simultaneously, moves
to consolidate fragmented projects to increase their viability should be
explored, once again with strict conditions on the rationalization of prices.
From the macroeconomic perspective, construction is far too important
a sector to be left unattended in today's difficult environment. Targetedaction is needed to get buying and selling back on track.
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