RBI Rate Cuts and Fiscal Stimulus Offer Hope, But More Needed for Housing Market Revival
The Reserve Bank of India's (RBI) recent interest rate reductions, coupled with the government's fiscal stimulus package, could encourage some homebuyers to re-enter the sluggish housing market. However, industry experts suggest that these measures may not be sufficient to fully revitalize it.
Some developers argue that the steps do little to directly tackle the real estate sector's primary problem: access to credit. The central bank's one percentage point reduction in repo and reverse repo rates, along with a 50 basis point cut in banks' cash reserve ratio (CRR), is expected to increase liquidity and make lending to homebuyers and developers both easier and cheaper.
Developers Seek More Targeted Measures
"Rate cuts will definitely have a positive impact on the demand for homes. The RBI's actions in the past have eased liquidity in the system, but credit flow to developers is still an issue," says Kumar Gera, Chairman of Gera Developers and head of real estate industry body Credai. Developers had hoped for an increase in the limit on home loans classified as priority sector lending from Rs 20 lakh to Rs 30 lakh and a higher exemption limit for tax benefits on home loan interest payments from Rs 1.5 lakh to Rs 3 lakh.
Real Estate Sector Faces Significant Challenges
Since the start of last year, the sector has experienced a sharp decline, with sales plummeting in the last quarter. This has impacted cash flow for developers, and the scarcity of bank credit and private equity funds compounded the problem further, causing project delays and layoffs. Given that real estate is a major employer and a key driver of demand across various sectors, the government is eager to boost this industry to spearhead a broader economic recovery.
Banks Hesitant to Lend Despite RBI Efforts
Despite the RBI's repeated CRR and key rate cuts over the past two months, banks remain reluctant to lend to developers due to the perceived high risk associated with the sector. This stems from the difficulties faced by several homebuilders in servicing debt and paying for land acquisitions amidst declining sales.
Government Initiatives Offer Limited Relief
The government's decision to permit builders to raise foreign loans, also known as external commercial borrowings (ECB), for township development is viewed as a significant step, albeit one with limited impact.
"The government move will not flood Indian real estate with funds, but in today’s time, every step counts. This is a signal to the developers to locate money wherever it is sitting," says Rajeev Talwar, Group Executive Director of DLF, India’s largest property development company currently working on several townships throughout the country.
Residential projects not within proposed townships are unlikely to see much benefit from this stimulus package, officials suggest. The government also committed to working with state governments on land availability for low and middle-income housing segments. Industry representatives believe this is unlikely to have any short-term effects.