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SharePalaniappan Chidambaram likes lower interest rates. He knows that this idea plays well in the EMI-obsessed middle-class constituency; even companies like money to be cheap, for it lowers their costs and keeps stock values higher than they ought to be
(interest rates and stock prices have an inverse relationship).
One need not quarrel with anyone's interest rate preferences, but if the logic is that lower interest rates will help the middle-class buy more homes cheaper, it's not going to work. Lower rates and tax deductions on housing loans have indeed encouraged many people to buy their own houses, but with real estate prices hitting the roof, the situation has reversed. Even with lower rates, most people today cannot afford to buy homes.
Properties located within commutable distances have doubled or tripled in value in metros like Mumbai and Delhi, and this makes the tax sops practically useless. In fact, the real beneficiaries of fiscal largesse are not the salaried classes, but housing finance companies and real estate tycoons, who have seen business boom like never before.
If buyers had to choose between high property prices and higher EMIs, most would probably choose the latter. Reason: the high price agreed can never change, but EMIs can fall when the interest rate cycle changes. In other words, when one looks at the overall cost of property acquisition, it is the price paid for the property that needs careful vetting, and not merely the interest cost or tax concessions.
To be sure, one is not asking for any controls on house prices. That would be the surest way to make property disappear from the market. To make houses affordable, you have to carry out reforms that will bring more houses to the market. Put another way, lower EMIs and sops help the demand side of the equation; to bring property prices down to equitable levels, you have to work the supply side.
You need to encourage more building and redevelopment. You need to reduce the rigours of archaic rent control laws so that more landlords are willing to lease out property. You need an efficient legal mechanism to sort out issues such as land titles, settle property disputes, and enforce the sanctity of deals.
Unfortunately, this is exactly what the government is most reluctant to do. The abolition of the Urban Land Ceiling Act is a good start, but it is a half-measure. Unless politicians and bureaucrats create a transparent system for allowing development of new properties, the actual release of fresh land for construction will be excruciatingly slow. This is why builders are still merrily pushing up flat prices in Mumbai, never mind that there are few buyers.
The crux of the problem is that land is the ultimate store of value, and everyone -- from politicians to criminals to bureaucrats and builders -- wants to control this resource. For politicians, it is an easy way to create black wealth, which can also be hidden from prying eyes. The underworld loves it for the same reason. Bureaucrats can make money by impeding projects and collecting speed money. As for the big builders, the ones already sitting on projects are happy to see land releases slow down; the only people who are interested in seeing more land developed are buyers and new builders, but they have no clout.
The politician-criminal-builder nexus works like an alliance against reforms. It suits them to lobby for lower interest rates and tax concessions
because they can then continue to fleece the home-buyer while pretending to be his benefactor. Ditto for home finance companies and banks.
The realty sector needs supply side reforms, and in this the states have a bigger role to play. The finance minister should focus his budget efforts to encourage states to push ahead with reforms, perhaps by incentivising them. Adding more sops is a con-job, a band-aid at best.
