Right on Home Prices, Not on Teaser Loans : The Economic Times

The RBI must revise its dislike of teaser loans

RBI governor Raghuram Rajan is right to prod real estate developers to start reducing prices to increase sale of their inventory , rather than to harp on interest rate cuts.But he is wrong to bar banks from offering teaser loans, which should be seen as a commercial decision solely within the realm of marketing choices that banks make.Elementary economics says that when supply exceeds demand, you lower the price. But most realtors hold on, hoping to outwait the buyers. Moreover, India has not seen a property crash for many years, and globally , property has been prone to long cycles of price rise and fall.The country's real estate market has partly been immune from price cycles due to the predominance of cash transactions in the sector. However, cash is not a choice for the salaried, who have become conscious of the prices they should pay . So, the market needs correction.

However, builders say an increase in the cost of land and other input costs over the last few years does not give them leeway to bring down prices.

They are not wrong either. Structural rigidities are stifling the Indian real estate market. The main reason prop erty prices have gone out of reach is the artificial scarcity of urban land.

Policy should identify zones for urba nisation. Change of land use, thereafter, from farming to commercial or residential must become automatic. Automatic conversion without bureaucratic interference and by cutting out middlemen will reduce the cost of land. The government should also improve the ease and lower the cost of doing business here, meaning, eliminate the layers of corruption that add up to real estate cost.

Teaser loans make sense for salaried borrowers, who often pay both a rent and the instalment on their home still under construction. When the home is ready for them to move in, and they no longer have to pay rent, they are okay with a higher rate of interest. Further, young people who buy homes also expect their incomes to go up in two-three years. Teaser loans suit the borrower and the lender. Why should the RBI say no?