The decision by government banks to offer special rates on certain types of housing loans seems a good one on paper. But there are significant risks for homebuyers.
Most would agree that real estate prices in India were way too high during the boom years. A correction is overdue. There are already early signs of declining prices in the major cities. The question is how far prices should come down before they bottom out. The previous cycle saw prices halve before they stabilized.
Why is this important? What the government and the banks it owns are trying to do is entice households to invest in property at a time when prices can still come down by a lot. Rational buyers will try to compare the gains from lower borrowing costs with potential capital losses from a further fall in home prices. The others may bite the bait and cry foul later in this downturn.
The government is correct in focusing on reviving building activity, because it will indirectly boost demand for steel, cement and workers. But this should not be at the cost of household wealth.