Housing Finance Problem or Solution?
In the 1960s if you wanted to buy a house, it was considered almost impossible to get a home loan. It was only in 1980 that Hdfc started giving home loans – and that too sensible amounts. That explains why Hdfc is so popular – people love the guys who gave them the HOME. Especially the first home.
However, reflect a little and you keep wondering how much is a problem, and how much is a solution is difficult to fathom. State Bank of India recently announced a home loan book of Rs. 100,000 crore. If that is the size of SBI’s share, then the whole market should be about Rs. 250,000 crore. This is not a small market by any stretch of imagination.
This should normally have created a big booming housing market all over the country….right?
It has not created supply. It has created a skewed market where you have the bigger cities on one side with very high prices. It has also not increased supply of housing in the smaller towns or even in the bigger towns.
Is there a solution to this? No. Not really.
Ownership is still cherished – so people will buy beyond their ability to buy and keep driving the prices up.
Surprising that big infrastructure companies have not thought of colonies on rent. Imagine a big company sets up a factory or an office 100 kms away from Ahmedabad. If L&T decides to buy about 400 acres of land and decides to construct houses – 1, 2, 3, 4 bhks – and gives it on rent to the people coming there, there will be no need for the employees to buy a house.
So slowly a guy goes from a 1 bhk to a 2 bhk on getting married, and eventually to a 4 bhk when his needs are at its peak.
Why does this not happen? Because funding is difficult to get for such a project. It is a project with an excellent IRR (remember there are enough people saying real estate prices cannot fall??).
How will the prices in the cities come down? Simply by improving the taxation system. If the richer areas with bigger flats started paying for everything on a cost plus basis, people will not want to buy in those locations. We have a very regressive tax system. The rich man gets subsidised water for washing his car!!
Put a ‘luxury tax’ – on the property tax for properties above say Rs. 2 crores, and you will see prices arbitraging. …..hmmm…
akshat
Sir, your views on this ? Equities are for the short term…
http://www.dnaindia.com/money/interview_you-can-shut-the-equity-market-india-would-still-be-doing-fine_1721939
LuckyOye
In an ideal situation, property taxes would be linked to the rateable value of a house/flat instead of a flat assessed tax. Of course, in an ideal situation, the declared rateable value should go up *as well as down* based on the local conditions. A regressive property tax system is only one part of the problem, not the only problem in itself. Fundamentally, property prices keep going up due to inflation + growth and hence they are looked at as investments.
Here’s one way to kill the property bubble as well as permanently make housing affordable for everyone: Declare residential property as a separate category of Capital, and put 100% capital gains tax (with no indexation benefit) on it. If buying another house in-lieu of an older one, then you can take deduction upto that extent, but no more.
Basically kill the propensity of people to buy multiple houses and simply keep it locked with the hope of price appreciation.
subra
i cannot argue with Shankar Sharma. Why not even with Vivek! Neither can I argue with Rakesh Jhunjhunwala. However when the Index had gone from 3000 to 6000, RJ came on TV and said ‘the market will go to 25,000’.
SS at that point was more articulate and established vis-a-vis RJ. He rubbished RJ and said ‘Just because your money has doubled you are talking like this…the poor common man should NOT come into the market at this stage..blah blah…he should wait for the market to COME DOWN’. Well the market went to 21000.
At 9000 I did a story in MoneyControl saying it is a good time to be buying…simply if you have money for the long run.
SS was on TV saying how 6000 is not an impossibility, and we should be prepared for a further fall. MC asked me for a view, I said, I do not know, but my take is, people should buy – and I added ‘but that is what i said at 11800 also, and I am NOT A TECHNICAL guy.
Then SS said ‘In my lifetime the index cannot go to 100,000’. I said ‘Mathematically it may or may not be right, because you are measuring 2 uncertain things – sensex and human life’
Frankly I do not agree with many things in that but:
‘the common man will no longer pay such high price for financial services’ – I honestly hope it is true.
pravin
“Basically kill the propensity of people to buy multiple houses and simply keep it locked with the hope of price appreciation.”
er. the reason people buy ‘physical stuff’ like houses and gold is precisely because the govt IS committed to creating inflation. howmuch ever the RBI speaks of ‘fighting’ inflation,it is clear that all modern central banks would collapse if they could not create continuous inflation.that is why even though we produce more food per capita than say 1960s, it costs 30 times more.the inflation is not going to go away -because it is at the core of the current paper money system.take it away and the system collapses.
the people buy and lock up stuff BECAUSE THEY KNOW that it appreciates versus the rupee.your solution is to simply kill the messenger.break teeth if child chews his nails kind of solution
i dislike property taxes because it assumes that even though you ‘own your property’ -you really dont.you continue to pay to the govt for the privilege of owning property.
this doesnt mean water,electricity,sewage or whatever facilites govt provides to the rich should be subsidized.it just means that they should be charged the market rate.increasing property tax is not the solution.btw,why is the govt providing garbage collection and other basic services to rich ? it is beyond me.they can arrange it on their own.far more efficiently.
subra
govt provides service as a pretext for taxing !! stop the tax and stop the service..that should be the sequence of operation….
Dheeraj
SS is a bear.. whenever I see his interview.. I feel this…
LuckyOye
@pravin, I appreciate that you’ve hit the nail on the head – “because it [inflation] is at the core of the current paper money system. take it away and the system collapses.”
One key reason that inflation is not only tolerated, but also mainstream thing is the premise of “growth”. Growth is when you really do more than the previous period. You produce more motorbikes, or become efficient at writing computer code, or extract more coal at lesser cost etc. When you have this “Growth” available, people tolerate inflation because prices, overall, could remain constant. More paper money (inflation) is balanced by more goods and services (growth).
Yet, “Growth” in anything cannot continue indefinitely. In the current economic context, we use the earth’s resources for generating growth, and as time goes by, these resources get depleted (especially the non-renewable ones like oil or rare-earths).
So here we are today, where, for the last few decades or so, worldwide, inflation was the way of running economies because we had spectacular growth rates, first in the “developed” economies and more recently in the “developing” economies.
But we’re hitting problems in Growth…contrary to natural resources being the brakes, its the Debt that is becoming the noose around the neck of growth. The Inflation game has gone on this long only because of Growth. With growth gone, who will tame the corrosive effects of inflation? As you said, system collapse will follow soon after, and if alternate systems are not ready, it could cause immense pain and suffering to everybody.
Coming to your comparison between house and gold, the comparison fails in one basic point…a house is a usable good, something that people actually use as a shelter and absolutely need. Hence, the point that investment for monetary gain be disallowed in it. Whereas Gold is not really a necessary thing. Its just something that people acquire when they’ve satisfied all their present needs. So, by all means, allow people to acquire and hoard gold and put it in their lockers, but please, please, prevent people from hoarding empty houses which can better serve by housing people.
subra
actually housing demand is a function of infra created around it. Mumbai is creaking and will soon croak but prices are sky high. This is because the rest of the country CANNOT create ENOUGH infra to pull jobs out of Mumbai. If that had happened, why the …..should people live here? Ditto Delhi. Ditto Bengaluru….
this makes no sense. If somebody can carve out 500 acres and create a Nariman Point in Pune, Sholapur and Nagpur…Mumbai prices should be down, right?
In fact the more the players the chances are prices should come down. If you legislate, you will encourage some kind of a ration – so black money will find a new avenue.
Also we do not just let go of the past. It took 30 years for the mill lands in Mumbai to be converted to office space. It could have been done earlier and the mills re-established 100 km from Mumbai…
Anyway the day the real estate bubble bursts…there will be blood on the streets again. Some of that will be ours.
pravin
subra,
the solution for that is a matter of political will.
i see no reason why mumbai is the capital of maharashtra.it should be aurangabad or somewhere in the middle of the state.that means a)nariman point and its environs will suddenly have acres of property in prime demand available for productive use rather than used for babus,netas and assorted hanger ons.
b)this will mean high quality roads to the interior of maharashtra.connectivity with the new capital will of prime importance. roads,i think are a good activity similar to town planning which a govt can do by using thumbrules like building a hub and spoke model for roads/cities instead of an up and down thing currently in mumbai.this has network effects and new developments can occur in the new infrastructure created.trying to improve mumbai’s train systems anymore is an exercise in futility.
not that the US is a great model for us to follow,but they do have good urban planning examples. small Albany is the capital of NY and not NYC. tiny Sacramento for California and not Los angeles.Austin for texas and not Houston or Dallas.
so,we are screwed unless the netas are ready to leave mumbai.
There is a good story about how the govt wanted to promote faridabad for industries,but it was neglected Gurgaon which came up on its own.the govt just created half decent roads.electricity and most of the rest actually came up dynamically .not that the people like it.they’d prefer sarkari supply of these stuff.but it is an example of how good roads can lead to new cities created bottom up
Ajay
Subra
Quoted full contents of this article in a real estate forum with link to article.
Let me know if you have concern, will keep in mind in future.
PrAvEeN
Some places are there for something., Mumbai as the financial capital of India or Bengaluru as IT capital of India.
Although with the high RE costs still I am seeing one or other startup being started in bengaluru every week. Even now if any US or European IT company want to come to India they first look at bengaluru. Some places are just are center of some fields., It will take a huge number of years for the SHIFT to happen (if it is)