State Bank of India’s demand to bring back teaser loan products has generated a lot of excitement among developers who are saying that the move will not only revive demand in the real estate segment, but will also bolster the overall economy due to spiral effect. However, they gave a thumbs down to the Reserve Bank of India’s suggestion that the property prices should be slashed to boost demand.
“Property prices are already below cost. There is absolutely no way prices can be brought down. There is no bubble in the sector. Average cost of land and construction have gone up. The prices at which properties are selling hardly covers the cost, where will the margin to reduce price come from? The RBI should try to understand and take into account the cost involved — floor space index cost, administrative cost, construction cost etc. There seems to be no consideration for these aspects,” Navin Raheja, CMD, Raheja Developers, told The Indian Express. He said that the SBI’s demand to bring back teaser loans will go a long way in bolstering the demand.
Last week, SBI chairman Arundhati Bhattacharya had told RBI Governor Raghuram Rajan that given the fact that the real estate stock is at two-year high and the sector has lowest non-performing assets, teaser loans could be allowed to revive demand, the way it was done post the crisis in 2008. Bhattacharya claimed that it had helped the demand improve.
Teaser-rate loans are multi-year loans that bear low monthly repayment in the initial two-three years. In India, banks were offering a fixed rate of interest in the first few years and a floating rate, which would be the prevailing rate of interest on a home loan, for the remaining tenure of it. Banks had withdrawn it after the RBI expressed concerns over it.
The suggestion, however, did not find favour with the RBI Governor who said that the sector will get a boost if developers slashed prices.
While agreeing with the SBI’s demand, sectoral experts cautioned that without the price correction of “overpriced inventories”, the demand is unlikely to go up.
In fact the combination of teaser rates and low property prices is needed to revive the sector, which has over 7,00,000 unsold inventory piled up.
“If you want to bring some respite to the ruling pressure on residential property, the conservative approach of the RBI on the interest rate has to change. The median lending rate has come down only by 30-35 basis points (bps) while the RBI has cut rate by 75 bps so far. The policy rate is being governed by inflation expectations and not actual inflation. Whatever has been done so far, more transmission needs to be done of the rate cut,” Samantak Das, chief economist, Knight Frank India, said.
He added that the unsold inventory at various stages of construction is largely due to lack of confidence of consumers on economic stability, concerns about developers finishing projects on time, and highly overpriced inventories.
“Price rationalisation is important for respite. Interest rate cut and price cut along with confidence of consumer is important for the sector to take off. Prices should not be more than 4-4.5 per cent times of the income in top eight cities,” Das added.
Anuj Puri, country head, JLL India, however, said that the scope of reducing property prices is only in the luxury segment and not in mid or affordable range. “Teaser loans should be brought back as it will bring a different kind of energy in the sector. Mid-segment sale is not happening because EMIs are very high. It needs to be brought down to 6-7 per cent from the current 10.5 per cent for the demand to actually pick-up,” Puri said.
However, developers believe the sales are not happening due to tardy economic revival.
The CMD of Raheja Developers said that inventory sale was not happening due to unavailability of disposable income with people to pay for instalments.
“There has been no increase in their income, there are no jobs and more than 55 crore youth are either underemployed or unemployed. The segment that will buy the house does not have income and that is why there is inventory pile-up,” Raheja said emphasising that for the real estate sector to grow, there is a need to relax norms for floor-area ratio and allow the industry to grow vertically, like other developed countries, without paying extra for the land.
For some time, as per the SBI’s suggestion, interest rates must be reduced substantially by subvention or such schemes so that people come forward to buy houses, he said.
“The economy can grow only when you hand-hold the real estate sector because it supports more than 200 industries. Central bank should handhold banks to help the real estate sector,” Rajeha added.