Bring down property prices, says Governor Rajan
He is perhaps the only governor of the Reserve Bank of India with the looks of a rock-star. Flamboyant and fearless, he is today known amongst school kids as well, given the way he makes his presence felt. The IIT-IIM alumnus, Raghuram Rajan, who had the audience eating from his hands, with his dosanomics that gave a new spin to economics has something to say about realty prices.
In the last 18-months the RBI has lowered interest rates by 150 basis points and it today sits at 6.5 percent. This drop is to encourage consumers to purchase homes and revive the falling real estate sector.
Earlier, Rajan had asked realty developers to bring down prices instead of piling up inventory. With property prices soaring up, the demand is trailing supply. People will get to invest if prices stabilise.
On their part real estate developers have asked for reducing the interest rate on home loans to encourage real estate business grow to which the governor responded saying he does not want to inflate the property prices by a cut in the interest rate of home loans. In vintage Rajan-style, he crunched the discussion with numbers. As of June 2015, home loans disposed of grew by 15.6 percent to Rs.6, 53,400 crores as against the previous year when it by 17.1 percent to Rs 5,65,000 crores. In contrast, the overall lending by banks grew by 12.8 percent in June 2014 and 7.3 percent in June 2015. His argument: the overall credit growth crashed with a brisk increase in home loans.
He further added that home loans given amount to 12.7 percent and 12.2 percent of the total loans in 2014 and 2013 respectively. The increase in home loans has not lead to a decrease in the stock of unsold homes. This shows that the growth in property prices plays the dominant role in unsold home stock.
Rajan sternly believes the central bank can identify a bubble while his US counterpart Alan Greenspan held bubbles are perceptible only after the fact. Rajan says the surging property prices are a bubble, and it needs to fall for the people to buy homes.
Knight Frank India, a real estate consultancy firm, argue that developers cannot drop down prices since the input costs, including the cost of land, have gone up significantly.
Recently Rajan again appealed to real estate developers to adjust property prices. He stressed there should be more transparency on land acquisition, construction, and sales, adding the building of houses and roads is a sign of growth for a developing economy like India.
Rajan cautioned that while there is a difference in how market and developer view the prices, it the situation continues, the real estate sector will be in a holy mess, as buyers will stay away, and sellers will pile stocks. Hence, the best solution will be to reduce the home prices for the market to function. QED.