Slowing economic growth in India has pushed many sectors into trouble. Aviation, construction, automobiles and many others have been hit. Many of these are what are termed “interest rate sensitive” sectors. Some of them have demanded help from the government and the latest entrants in the queue on this count are realty companies.
This paper has argued against bailouts to any company or sector unless such bailouts have the potential to spur economic growth. In the case of realty companies, there is no ground for this. There are reports that the government is pushing banks to offer interest rates on housing loans up to Rs20 lakh at pre-2004 levels. In other words, interests on these loans could be as low as 7-8% while the current market rate is in the 9.5-10% range.
This is clearly a bailout for private realtors even if they are not being handed out cash doles directly. A lowering of interest rates on home loans will amount to that.
In recent times, housing transactions in various metropolitan areas have come down by as much as 50%, both for pre-existing housing stock and for recently constructed homes. High interest rates are a basic cause for this state of affairs. The solution being touted by realty companies is a reduction in interest rates. This is not a solution, but something that will lead to the creation of more problems.
The first question is, who will bear the cost of this forced reduction in interest rates? If the government bears the subsidy, who will pay for that? In properly functioning markets, producers and consumers are responsible for bearing the costs of misallocations. The same economic agent should reap both the profit and the loss for his decisions. The two should not fall on different persons.
In the case of realty companies, the effect of interest rate reduction to prop up sales will result in the government bearing the losses while realtors are free to walk away with the profits. In such a situation, it should be asked why these companies should not reduce or forgo their markup over costs to spur sales.
An artificial propping of realty companies would be unfair, too. If they can be bailed out, why not bail out all interest rate sensitive sectors of the economy?
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