MUMBAI: P Chidambaram, the newly-appointed finance minister, has asked chiefs of government-owned banks to put pressure on real estate developers to lower property prices in order to get the economy moving.
In a meeting held last Saturday with bank chiefs, the finance minister told bankers to impress upon builders the need to complete projects according to schedule and lower the prices of apartments that are ready for possession but not getting sold.
"Builders are sitting on huge inventories (unsold apartments) which they are neither able to sell at the prevailing prices nor are they allowing others to buy by lowering the prices," a banker present at the meeting quoted Chidambaram as saying.
The finance minister pointed out to the bank bosses that close to 5 lakh flats were lying vacant. "A huge quantum of capital is locked. Why are banks not putting pressure on them (builders) to lower prices since you have funded both the builder and the retail home loan borrower," he told bankers.
Banks have lent close to Rs 1.2 lakh crore to builders while their home loan portfolio came to Rs 2.5 lakh crore in the last week of March 2012, according to RBI data.
"Given the slowdown in the economy, builders should take a relook at the market condition and should effect some reduction in prices across the board — from premium to affordable. Builders should not expect only banks to lower interest rates on home loans to revive the economy, they too should contribute by lowering home prices which by itself would act as an additional stimulus to the economy," said S Raman, CMD of Canara Bank.
"You must instigate borrowers to demand possession immediately or as per the schedule. You must also find out what is enabling builders to hold on to these vacant flats," said a senior banker quoting the finance minister.
While no one opposed the FM's suggestions, some bankers stressed the need to put in place a real estate regulator to tackle malpractices in the sector, including lack of transparency about the size of the property or the date of completion of projects. Builders, however, appear reluctant to lower prices on account of what they described as rising input costs.
"I don't think there's scope for a price cut given the kind of input and finance cost escalation we have already witnessed, unless we recover these costs along with requisite margin," said T Chitty Babu, chairman and CEO of Akshaya Home, a property builder.
Property Prices Have Risen After Recession
Chitty Babu is also the national secretary of CREDAI, a body that represents realty developers across the country.
"Price rationalisation can be achieved only by means of enhancing availability of funds for projects and single-window clearance. Cost reduction of 10-12% can be easily achieved if the government decides to introduce single-window clearance," he said.
Banks may have little leverage over builders whose loan accounts are regular. However, those builders seeking to restructure loans would be more amenable to pressure.
India is among the few countries where property prices have actually risen after the recession of 2008 while major economies such as the US, UK and even China have seen an absolute reduction in property prices. Renu Sud Karnad, managing director of HDFC, the country's largest mortage lender, agreed with the finance minister.
"The need to reduce prices is more in metros. And any effort to reduce housing prices and revive the realty industry will surely help in kick-starting the economy as the sector is linked with several other sectors."
"We can only suggest and coax developers to reduce prices, we cannot force them. In the past, developers have cut prices and even now some are doing it indirectly through various schemes," she added.
"Barring some metros like Mumbai and Delhi where land cost itself accounts for 70-80% of the house value, prices are still affordable in tier-II and tier-III cities." Bankers who attended the meeting said Chidambaram's intent was to revive sentiments.
Giving an account of Saturday's meeting at a press conference afterwards, the finance minister urged banks to lower monthly payments on loans for consumer durables though he made no reference to the discussion on property prices. The UPA government, which is in the dock for alleged corruption scandals, is also faced with the challenge of reviving an economy in which growth has slipped to 5%, the lowest since 2003, while inflation remains stubbornly high at just below 7%.
The government is keen to revive its flagging popularity among the influential urban middle class, which finds itself caught amid the triple whammy of higher interest rates, inflation and stagnant salary growth in most sectors.