The Hindu Business Line : Cheap finance: Key to housing

Reduced home loan rates, more tax incentives for buyers, faster approval of building projects and lower government levies are some of the ways to prop up the sagging housing market.

— D. Gopalakrishnan

Any takers?...Buyers are not coming forward to finalise deals.

R. Balaji

Remember the advertisement featuring an affluent young IT professional in a first job chipping in money to help out the father on the verge of retirement.

Such a situation was apt till recently, not any longer. Here is a real-life story: The father is a worried man. His son, a young professional paying back a home loan of about Rs 30 lakh borrowed a few years earlier, is making an EMI payment of about Rs 24,000. A couple of years back this EMI included an interest of Rs 18,500 and principal repayment of Rs 5,500. Interest rates were then in the single digit.

Since then the rates have risen steadily, the interest component alone has jumped to Rs 29,000 in the last few months. But with the EMI at Rs 24,000, the shortfall of Rs 5,000 is being added to the principal every month.

The youngster is getting deeper into debt by the month and could become indebted perpetually. And this is for someone borrowing from one of the nationalised banks, which are holding interests rates at relatively lower levels than housing finance institutions.

The concerned father rushes to the bank with his savings and makes a bullet payment to ensure that the principal comes down enough to ensure that the EMI at least covers the interest.

As the market clamours for a drop in home loan interest rates to rejuvenate the housing sector and attract new buyers, the existing borrowers appear to be worse off than those considering a home loan at the prevailing rates. At least the new buyers can plan what they can afford and go for a smaller house and a smaller loan. But now, potential buyers are not planning anything but simply staying away, say developers.

Lack of interest

Buyers are not coming forward to finalise their deals as the morale is low. Consumers are afraid of what might happen in these uncertain times in the backdrop of the financial crisis.

According to one developer with a nationwide presence, who did not want to be named, the action needed on the ground is to increase customer confidence. Home loans have to be affordable and interest rates brought down to about 8 per cent. Home demand is ‘EMI sensitive.’

Banks have brought down interest rates by about 75 basis points in the last one month and they say it is up to the developers to bring down prices.

Real estate developers acknowledge that the interest rate reduction is a step — even if a small one — in the right direction.

The reduction may not be enough to nudge the market up but at least it is a clear signal that interest rates are not likely to go buoyant in the near future, they say.

Apart from bringing down home loan interest rates charged by banks and housing finance institutions, the Government has the capacity to bring down prices, say developers.

Special status needed

According to Mr M. Murali, Managing Director, Shriram Properties, the housing loan segment should be given special status and housing development deemed as infrastructure development. Home buyers should get tax incentives for affordable housing, income-tax breaks by restoring Section 80-I (b) benefits, waiver of service tax and VAT, and stamp duty cut to 2 per cent.

Building plan approvals should be simplified with projects with a built-up space of 1,250-1,500 sq.ft fast-tracked and cleared through automatic route. This would support housing development for the middle and lower income groups and be a more viable option to develop affordable housing rather than expecting local governments to provide housing projects.

Employment potential

Supporting real-estate development also offers other advantages, Mr Murali argues. The real estate sector would create large employment opportunities to the needy sectors of society.

He cites his own company as an example — over 76 lakh sq.ft of construction undertaken by Shriram Properties in the next 36 months would give employment to about 40,000 people for the next duration.

According to Mr P. Suresh, Managing Director, Arun Excello Foundations Pvt Ltd, new projects are coming up offering built-up space at lower prices that are viable and in line with cost of construction and land prices.

But in the case of projects that have been committed, the land cost and cost of construction have been high, and customers cannot expect an across-the-board reduction when the builder has incurred the cost.

High Govt levies

State and Central Government taxes alone account for up to 35-40 per cent of the cost, which will have to be reduced. The builders too should commit to pass on such benefits to the customers to revive the market. Reduction in interest rates that would bring down the EMI load for the buyer will be of significant value.

According to representatives of the Confederation of Real Estate Developers Association of India, plan approvals have to be faster — the two-year delay now to get the paperwork done for a project adds significantly to the cost.

Let the Government back up its commitment to making housing affordable by reducing levies and taxes. On every Rs 3,000 a sq.ft a home buyer spends to buy a house, the Central and State Governments make more than Rs 900. Housing is not a luxury and does not deserve to be saddled by such high taxes. Even luxury items attract a maximum of about 16 per cent as taxes, they argue.

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