RBI’s monetary policy inimical to real estate

RBI’s monetary policy inimical to real estate

New Delhi: Reserve Bank of India (RBI) should immediately review its monetary policy to remove its excessive focus on taming inflation only and concentrate on reducing mortgage rate, besides taking measures to curtail interest rates to enable wage earners to afford dwelling units - this was the key finding of a study carried out by Assocham on ‘ Reality check on real estate’.

Past president and chairman, DLF Universal, K P Singh while releasing the document said, “RBI has been framing its credit policy with an over focus on containing inflation, totally ignoring its adverse consequences on real estate. There has been no thought in reducing interest and mortgage rates, and the policy is therefore proving to be inimical to real estate growth."

Key Findings

* Increase in interest and mortgage rates have led to housing prices shooting up. Government should get out of the business of infrastructure building and leave it entirely to the private sector to spur growth, similar to what it had done in the telecommunication sector few years ago

* Even as default rates on installment payment of home loans rose around 4.5%, Indian real estate market, estimated at $14 billion is likely to be $90 billion by 2015 with demand for commercial and residential property surpassing supplies

* Real estate sector is growing at 30%; demand is likely to continue surpassing supplies; estimated $10 billion worth of investment is expected to flow into the sector by end 2008

* Returns ranging from 12 - 30% coupled with cheap and easy availability of funds have seen people from all walks of life investing in Indian realty

* Improving institutional framework and fiscal benefits encouraged more players to enter the market - high net worth individuals, NRIs, financial institutions, private equity funds and retail investors

* Housing, constituting 80% of India’s real estate development witnessed huge demand, which will multiply further. According to Global Report on Human Settlement 2005 - ‘Housing crisis in the making’, 40% people will require proper housing and basic infrastructure by 2030

* Home loans formed 11% of total outstanding credit of scheduled commercial banks in March 2005, up from just 2.4% in March 1990

* Sales value of housing construction witnessed an exceptional leap from Rs17.61 crore in 1991 to Rs4,182.67 crore in 2006 (lower interest rates was one reason)

* Rising home loan rates, resulting from Reserve Bank’s measures to control overheating in real estate market, severely impacted genuine buyers: interest payout on housing loans amplified with sharp rise in home loan rates and annual additional burden which was as high as Rs39,000

* Home buyers received double blow with rise of more than 400 basis points since January 2006 and property prices mounting by 50% to 100% in most locations; eligibility of borrowers came down by roughly 28% since the hike in interest rates

* Speculative purchasing activity in housing markets came down as funds become dearer, evident by drop of 60% in sales in resale market of Mumbai, Delhi, Kolkata and Bangalore as compared to 35% to 40% rise in May 2006

* Growth rates of housing loans came down to 29.1% in FY 2005-06 and 26.6% in FY 2006-07 as compared to 49.5%, 73.9% and 48.6% in FY 05, FY 04 and FY 03. This growth may slow down to 17% to 20% in FY 2007-08

* Home loan to GDP ratio in India is just above 5%, significantly lower than developed markets of US and UK, where it is more than 50%


*Government should repeal Urban Land (Ceiling & Regulation) Act, 1976 which imposed ceiling on quantum of vacant land that any individual can possess in urban areas, with view to prevent concentration of urban land in few hands, speculation and profiteering from it. Act is applicable in states of Andhra Pradesh, Assam, Bihar, Maharashtra, Jharkhand and West Bengal.

* Rescind rent Control Act which will be instrumental in meeting growing need for housing. It puts restriction on upward movement of rental values in accordance with market dynamics, leading to withdrawal of existing housing stock from rental market and stagnation of municipal property tax revenue.