Builders — by no means famished like Oliver Twist —- are always asking for more. Their earlier clamour, before this year’s Budget, was for infrastructure status for housing, which would allow them a 100 per cent profits deduction for 10 years. The Finance Minister did not fall for this one, but instead continued with demand-side incentives.

He allowed a Rs 1 lakh deduction for first-time home buyers whose loan was less than Rs 25 lakh. This is in addition to existing tax deductions for home buyers, and priority sector status for home loans below Rs 25 lakh.

These incentives, as well as hard-sell of retail housing loans, has kept the sector growing at a faster rate than the rest of the economy. Do we need to top this up with a supply-side boost for ‘affordable’ housing -- placing projects under Rs 25 lakh in the ‘priority sector’ lending category? The housing market is driven by malpractices rather than the textbook logic of supply and demand. Therefore, absurd as it may seem, an increase in supply of affordable housing in such a market is likely to further drive up housing prices. People don’t buy houses; they ‘invest’ in them, with the support of banks. A house is viewed as a high-yielding ‘fixed deposit’ like none other. As more ‘affordable’ houses – if Rs 25 lakh is indeed to be considered affordable – come up around us, the stock of empty but sold homes will keep rising, as in the Rs 50 lakh and above category.

The prices of ‘affordable’ homes will then increase at a higher rate than at present, turning the logic of supply and demand upon its head! True, steel and construction activity will revive, generating jobs, but ends cannot justify the means. Priority sector lending will rise, bypassing the homeless.

Before giving credit and tax incentives, we should clean up this sector, so that prices reflect genuine, and not rigged, values. For that to happen, black market activity, a major cause of investment interest, should be nipped in the bud – which can be done with minor changes to the Income Tax Act. Prices will correct when a house is seen just as a place to live in.

Housing needs a distinct regulator to deal with its wide-ranging violations. And a well-regulated sector should also incorporate affordable housing as an obligation, comparable to ‘universal service obligation’ in telecom – without the business seeking incentives for the same.

Developers need no props right now. The ‘finance, real estate and insurance’ sector grew by 8.6 per cent in constant prices in 2012-13, way above the economic growth rate of 5 per cent. Add to this, the price rise in housing of 7-8 per cent per annum (the difference between growth at constant and current prices, it is also an underestimation of price rise in view of black money deals), and it is clear that builders still have pricing power, despite the slowdown.

Banks, too, are living it up. Gross bank credit to retail housing was up 17 per cent in the year ended May 31, while priority sector housing credit (below Rs 25 lakh) was up 11.4 per cent.

Credit to commercial real estate (or to builders) was up 14 per cent as well. Where’s the problem?

Read also: Should developers’ loans get priority sector status? - YES

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