Real Estate Prices Need to Come Down: RaghuRam Rajan

 

Bhiwadi - 21th Aug 2015

MUMBAI: Reserve Bank of India governor Raghuram Rajan on Thursday said that real estate prices need to come down in order to ease lending norms for home loans. The governor's comments come at a time when unsold housing stocks are at a two-year-high and developers continue to hold on to prices despite a sharp fall in transactions.

With credit growth at a two-decade low, SBI chairman Arundhati Bhattacharya on Thursday proposed that the RBI allow banks to provide home loans below the Base Rate. Such home loan schemes were available five years ago and were then described as "teaser" loans by the regulator. She was speaking at the 'Banking and Economics Conclave' organized by the bank. Rajan, however, said that builders should first bring down prices and clear the stock else easier home loans might keep realty rates high.

"In 2008, when the economy started faltering, one of the things that helped demand was the 8% housing loan that SBI gave. At that point of time, it was tagged as a teaser loan but we at SBI refuted that because there was no change in due diligence or eligibility. The only thing was that rates for first few years were lower," said Bhattacharya. According to the SBI chief, there was two years or unsold real estate stock and home loans are one of the safest assets in the books of banks with minimal defaults.

Rajan, who won worldwide fame for his forecasts on the sub-prime crisis, however, struck a cautionary note. "I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don't want to create a situation where prices stay high at the level, which means demand can't pick up," Rajan said at the conclave.

Raghuram Rajan

Although sub-Base Rate loans may sound good for borrowers, they largely help new borrowers. For existing borrowers to benefit from reduction in costs, the Base Rate will have to see a reduction.

During the first quarter of the fiscal, bank credit has grown by 1.2% compared with 1.7% in the previous year. According to Madan Sabnavis, chief economist, Care, the retail segment continued to be dominant with a growth of 4% as against 2.7% last year. Within this, home loans and vehicles were the leading sectors with growth of 3.9%. Growth in credit to the manufacturing sector has been negative at 1% as against -0.3% last year.

 

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