Can bankers reduce property prices?

Thu, 23 Aug Pre-Open

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Since his appointment on the hot seat as the new Finance Minister of India, Mr P Chidambaram has desperately been trying to get the economy moving. One sure fire way is to get people to spend more money. The Finance minister has now asked PSU bank chiefs to get developers to lower property prices of homes in order to get the ball rolling. Bankers have been asked to goad builders to complete their projects according to plan and lower the prices of houses which are ready for possession but are yet not getting sold.

Builders are currently sitting on huge piles of inventory but are otherwise cash strapped for funds. They are unable to sell these apartments at current asking prices due to stagnant demand. And they are refusing to lower prices for fear of losing out on a better deal in the future. They claim that they need to recover increased input costs. India is one of the few countries in the world where property prices have actually risen after the 2008 recession. In the US, UK, China etc property prices have seen an absolute reduction. The ministry's move to ask stimulate the flagging property market makes a lot of sense. Close to 5 lakh flats are lying vacant and a large quantum of capital is blocked in the same.

Banks need to put pressure on the builders to lower prices and collect cash. Especially since they have funded both sides of the story i.e. the developer as well as the home buyer. According to a leading business daily, banks have lent close to Rs 1.2 trillion to builders while their home loan portfolio came to Rs 2.5 trillion in the last week of March 2012.

Considering the current slowdown in the economy it makes sense for builders to reassess the market situation and reduce their inventory stockpiles. This can be done across the board right from premium to affordable housing. Some banks, especially State Bank of India (SBI) have cut rates on home loans. But, this doesn't matter much, if housing is still unaffordable. In order to stimulate demand, some effort must be done on the developer end in order to increase sales. A real estate regulator is also needed in order to tackle malpractices in the sector. This will help increase transparency in the industry as well as provide a more realistic outlook on completion delays. With high interest rates, stubborn inflation and benign growth in salaries everything needs to be done in order to revive demand. Only time will tell if the bankers will succeed in reducing property prices and revive demand.