The Reserve Bank of India is trying to revive real estate demand in India by cutting interest rates and risk of home loans. Arguments are put forth about the deflationary nature of the current economy and the necessity of monetary action to boost prices. Yes, commodities such as steel, cement and oil are facing deflationary pressure. But real estate, which benefits from soft commodity prices, has not seen any price correction.
It is surprising that the steep rise in prices of properties due to the liquidity-generated price bubble is being ignored by policymakers. Instead of allowing the market to settle at a level where real estate prices would be affordable for the masses and thus lead to revival of demand, policymakers are fuelling a further price rise by injecting liquidity into the housing market.
The argument that interest rate reduction would make homes more affordable for those yet to own one is surprising. A one per cent dip in home loan interest rates cuts the equated monthly instalment (EMI) to Rs 36,000 from Rs 38,500 for a Rs 40-lakh loan over 20 years. It would be interesting to believe that a person, who is unable to pay Rs 38,500 as EMI, would be able to pay Rs 36,000 as EMI, given that interest rates may change in the next quarter.
But a drop in interest rates does benefit builders sitting on unsold inventories, who may afford to do so for some more time. Real estate investors too can get better returns as the cost of funds slides.
Amit Purohit Bengaluru
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