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Pre-empt a real estate bust in India
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There are lessons for India from the U.S. debacle.
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The origin of the present economic recession in the U.S. is largely blamed on the real estate debacle, whose causes had surfaced about a couple of years earlier. Now, the bust has come full circle after long debates over sub-prime losses and large-scale home-loan foreclosures.
The Federal Housing Administration (FHA) has been engaged in a huge rescue package to prevent foreclosures and infuse fresh blood into the housing segment, which normally contributes substantially to the Gross Domestic Product of the U.S.
The package, reported to be the brainchild of the Democratic Party, is awaiting the House vote, though the President, who has veto powers, is said to be against it. The Democrats, however, hope to muster the support of many influential Republicans.
An analysis of the real estate sector and a look at its journeys in the past two or three decades will help to understand what led to the present state of affairs. The Indian real estate sector can draw a few lessons from the U.S. experience.
The real estate boom in the U.S. began a quarter of a century ago when the white-collar Asian population started investing in houses with the twin objectives of wealth building and tax savings. What started as a wait-and-watch action turned out to be a mammoth growth path in the 1980s and 1990s when the real estate developers and financiers put most of their otherwise idle money in the housing sector.
Tax exemptions too came in handy. Capital gains were exempted from tax liability. Townships and housing complexes came up everywhere. Long-term mortgage loans became the main lending avenue for banks, with practically meagre equated monthly instalments. Interest rates hovered around two per cent. All this encouraged prices to skyrocket.
Supply of ready-to-occupy apartments exceeded demand. Unbridled expansion and reducing returns from dead investment led to uneconomic business, the home sales falling to a seven-year low in August 2007, eight per cent less than that of the previous year.
What transpired finally was the accumulation of bad loans which needed to be written off in one form or the other.
The Indian scene
The real estate sector in India is still uppish and except finding resources to fund, it is not sceptical about the future. Bu is it too optimistic? Will not the rising inflation affect, one day or the other, real estate as well?
Should not India learn from the waivers and write-offs of farm loans? Will it not be foolish to turn a blind eye to the disasters affecting strong economies of other countries such as the U.S, Japan and some in Europe?
Will not the rising land value, the steel and cement cost, despite temporary efforts by the government to contain the prices, affect the repaying capacity of the home buyers? And, last but not least, will not the interest rate on home loans, though not rising sharply, make the loans costly, and over the years make it burdensome, especially to the small borrowers?
Increased supply may not be the deciding inflation factor here, whereas the cost of supply may decide the quality of the loans and sustainability. Let us not, therefore, ignore the warning signals which are clearly visible.
Some pre-emptive action points can be:
* Restrict the unbridled expansion.
* Let the proposed regulator be put in place without delay.
* Preventive action may be initiated against speculation.
* Encourage only genuine builders and buyers.
* Prior booking of 100 per cent units in large housing complexes be made compulsory.
K. SUKUMARAN
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