Economic Highlights

New Delhi, 20 October 2008

Halt Housing Loans 

REIN IN REAL ESTATE SECTOR

By Shivaji Sarkar

The Finance Minister’s call to corporates to reduce prices has gone unheard. Worse, the corporates, under the belief that they have little to do with the government except take favourable packages, have rejected the suggestion. Surprisingly, the real estate sector too, which has 49.6 per cent profits has not paid heed.

Sadly, when it comes to profits, the corporates believe in corporate sovereignty and not in social responsibility. In case of losses, they dump the responsibility on the society -- seek bail-out packages from the government and maintain their huge profit margins.

However, it is true that not all industries can lower the prices. The manufacturing sector, reeling under heavy pressure from lack of consumer response --- demand and a heavy input certainly cannot afford the price cut.  It is working on a profit of about 3 per cent less from 9.9 per cent in 2007.

As against this, there are host of others such as in the pharma sector, banking, telecom, power, metal, IT and real estate who are best placed to offer discounts. They are working on profits to the tune of 9.4 per cent in case of pharma sector to 49.6 per in the real estate sector. The banking sector too has maintained its profit over 13 per cent in this depressed market through a slew of high fees and wide-interest spread. It is thus prudent for the government not to take up all industries in one go. Instead, it needs to take exemplary actions starting with the highest profit making industry – real estate.

Ideally, industry should function on an interest of 7 to 8 per cent. In no case should it go beyond 10 per cent. The margin is sufficient to rake in its costs and create a disposable spare income for savings and further growth. Regrettably, lack of regulations and too much of freedom has created a situation where high margins at the cost of the common man have become the rule.

The industry lobby has been keeping the government under pressure so as to keep its eyes off from their cashbooks. In fact, it has created an exploitative system, which has created a wide social disparity leading to severe discontent.

Not only is it time to act, but also to probe how some industries such as banking, power, hotels, metal, telecom and the real estate are able to rake in such high profits. Clearly, there is need for regulation, particularly in the housing sector, which is flying free. It is violating all norms and keeping the housing prices sky high. In fact, the very purpose of giving it a boost – providing affordable shelter to the common man – has been defeated. Not only is it bleeding the common man but so also the banking and finance system.

Diversion from the housing sector to hotels, media and other infrastructure sector has also been high. Thus raising a basic question for the finance sector: How and why did they finance houses that are priced much higher than their actual costs? It is a good idea to finance up to 90 per cent of the costs of a house, but if this helps to rake in profits for only a few, brakes need to be applied.

Sadly, the banking sector, functioning on the common man’s money, has not done this. It simply has not questioned the rationale of pricing because it is concerned about its own profit, even if its financing is creating an exploitative system!

The Prime Minister’s high-powered economic crisis committee has announced augmenting resources of the National Housing Bank (NHB). The purpose is to use the funds to extend greater refinance to housing finance corporations (HFC) for low-value (up to Rs 15 lakh) housing projects. The move should not only boost activity in the cement and steel industry but would definitely be less risky. A noble move alright. But it has been seen that such objectives are viewed by the real estate sector not to serve the cause but to increase their margins.

The banking sector thus needs to be given a bigger mandate beyond financing. Presently it does an evaluation, which is based on whether it would be able to get back its investment or not. In many cases, projects have simply not come up for years, causing loss to the borrowers. But it has neither affected repayments nor it has affected rogue housing firms. The banking sector has to play an effective role.

An average urban house is priced more than double the cost. A speculative price is added to the original cost and this has created an inflated pricing regime. The banking sector should be issued instructions to evaluate the actual construction cost, which include land acquisition, cost of money and cost of input and labour. Over and above these a three to four per cent margin should be allowed to fix the final price of a house.

If this is done, it is certain that even the highest-paid house would have a price, less than half of what is being charged now. Remember, it is not only necessary to protect the consumer but also the funds being financed. This apart, high pricing deprives funds for other housing projects. The nation is still short of about 40 million dwelling units and the banking sector needs to help out. India is far behind the global housing development process, even from countries like Brazil, Poland, Hungary and China.

There is also need for setting up an effective and strong regulator for the purpose of keeping check on prices. The banks and the regulator should have powers to penalize the erring housing firms (not the borrowers) and other developers. Today, the biggest mafia is in the real estate business for lack of any regulation and policing.

It is also clear that the housing industry would not like any policing measures. But it is for the government to decide whether the industry can run a country or whether the consumer fuels the economy. Till such time the measures are put in place, the government should ask both the banking and finance sectors to stop extending loans, with individuals building private single housing units being an exception.

The industry must act responsibly. Profit alone cannot be its motive. If the government is able to do this, not only would there be a check on prices but the development process itself would be fast and multi-dimensional. ---INFA

(Copyright, India News and Feature Alliance)