Home buyers vs builders: Whose side are you on, Mr FM?

That realtors are lobbying hard with the finance ministry is now becoming clear with Finance Minister P Chidambaram asking the Reserve Bank of India to look at all possible options to finance the housing sector. Significantly, the move comes close on the heels of the realtors’ association urging companies to sell unsold houses at lower prices.

A report in the_Economic Times_today says the finance ministry has now asked the RBI to ease provisioning norms so as to free up more capital for lending towards the housing sector. The ministry also wants real estate being accorded infrastructure status.

Many countries have accorded infrastructure status to real estate, which helps companies arrange funding from domestic as well as foreign market at cheaper interest rates.

India’s real estate sector has been lobbying for this status for long, but the authorities have not yet budged. Even if it materialises, consumers will benefit only if it is used for affordable housing.

[caption id=“attachment_553235” align=“alignleft” width=“380”]  If the finance minister is on the side of home buyers, he should first demand to see a serious drop in house prices before asking banks to ease credit. AFP[/caption]

Again, the government’s stand is diametrically opposite to that of the RBI. The banking regulator has time and again warned lenders against their exposure to the real estate sector.

In 2009, the RBI had increased banks’ provisioning for standard assetsto 1 percentfrom 0.4 percentafter house prices crashed in 2008 and builders found it difficult to repay loans. The central bank’s move was aimed at mitigating any asset quality risks for banks.

Recently, a media report said the RBI has asked banks not to restructure real estate loans and push for recoveries instead.

“If builders are forced to repay their debt then they will not be able to hold onto prices, which in the long term can help rein in the artificially high property prices and, in effect, take care of this key contributor to high inflation,“ a _Firstpost_ report said earlier .

Banks have, over the last few years, become more cautious about lending to the overexposed sector. But it looks like the finance ministry once again wants to hand-hold builders, who have been adamant at holding prices high.

Realtors are in dire straits as private equity funding too is drying up.

Four years back, when bank credit was easily available, builders diverted bank finance to buy acres of land, rather than completing projects. The net result: incomplete projects but rising prices due to inordinate delays.

This is because easy and cheap availability of money inevitably leads to a bubble. This is precisely why builders never reduced the inventory prices per unit.

Viewed against this background, realtors association Credai’s recent exhortation to builders to sell unsold inventory at lower prices seems to bea classic case of you rub my back and I’ll rub yours.

Developers have said that bringing down prices would be difficult unless liquidity improves. However, it is far from clear that even if this happens, developers will bring prices down.

If the finance minister thinks easy bank credit will bring down prices, the reality is that it could just enable developers off the hook and hold prices for longer.

But as the chairman of a state-run bank told The Economic Times, “Easing the provisioning norms will free up more capital for banks and they may bring down interest rates for housing developers. But I doubt if that rebate will be passed on. The housing sector is opaque and there will always be other reasons determining pricing.”

In a nutshell, instead of taking such indirect routes to control the sector, the government should first create a regulator for the sector - a long pending consumer demand. The government has been dragging its feet.

If the finance minister is on the side of home buyers, he should first demand to see a serious drop in house prices before asking banks to ease credit.