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Chidambaram hits realtors, home buyers

business Updated: Apr 21, 2007 00:32 IST
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Finance Minister P Chidambaram’s diktat to public sector banks to reduce credit growth to the real estate sector and to be selective while advancing housing loans above Rs 10 lakh will adversely impact middle class home buyers, especially in the metros, industry watchers said.

The loan component in most house purchases in the cities exceeds Rs 20 lakh. With a buying slowdown already evident, developers too will be impacted.

It is the middle class that has been dependent on banks for funding home purchases, and any stringent guideline would hurt them the most rather than rich who purchase flats from their own surplus funds.

Banks have already witnessed a sharp decline in housing loan applications from prospective buyers. In this context, a second caution from Chidambaram within a month has come as a surprise for realtors and fund managers.

“This is going to hit investors and broker transactions the hardest, followed by professionals who have individually investing in property,” said Shashi Kumar, Chief Investment Officer of the IndiaReits Fund. “With money getting sucked out of the system, development in small towns will be the first to get hit too,” he added.

“Developers will be badly hit. It has already started impacting projects. Bank loans have sharply declined and it will dry up further. Apart from developers, customers who are looking for low cost housing will find it difficult to augment resources.

All this is leading to a slow down and a market correction,” said an analyst from JP Morgan.

The developers concede that the finance minister’s attempts to suck out money from the system to prevent overheating will impact them adversely, but they are being brave-faced about it and see it as a temporary measure.

“It was expected. He is focused on curbing inflation and tightening liquidity in the market. Real estate is one among many sectors those have been targeted. But this is a temporary measure and how long he can prevent banks from lending to the housing sector, the safest investment for banks,” said Mohan Deshmukh, president of the Maharashtra Chamber of Housing Industry (MCHI), the apex body of the housing sector in the state.

Deshmukh said curbing bank loans for low budget house buyers (below Rs 40 lakh a flat) may have some psychological impact for a temporary phase, but developers will remain insulated.

“The supply is not even 50 per cent of the demand. We are building 85,000 flats a year in Mumbai as compared to the demand for two lakh flats. Out of all house buyers in Mumbai only 40 per cent buy flats below the price of Rs 30 to Rs 40 lakh and this is the segment that go to banks for loans and they will be affected.”

Developers said that rather than reducing bank credit for housing sector, the government should increase the housing stock to increase supply and stem spiraling prices. “The rich will anyway continue to buy flats either for their own use or for investment. What will happen to the service class that is solely dependant on banks? The government is depriving them from buying a house and we will sell our flats anyway,” said a developer asking not to be named.

According to Mantri Reality Chairman Sunil Mantri bank credit would continue to be available for developers and individual buyers but at a higher interest rate. “People have accepted the rising interests due to higher cost of funds and flats for self occupation will continued to be sold. But speculative buying will be impacted,” Mantri conceded.

“If banks at the behest of the government continue to neglect the housing sector, Foreign Direct Investment (FDI) which is already coming in a big way will dominate the sector,” he added.

Mantri said, “Now if FDI funding is to the tune of 30 per cent in the Indian housing sector, it will increase to 90 per cent, putting the bank’s funding ratio at a poor 10 per cent. This would harm the interest of banks in the long run.”

Though Chidambaram has asked banks to spare housing loans of upto Rs 10 lakh, can a home buyer find an apartment in Delhi or Mumbai less than Rs 20 lakh?