Monday, 21 August 2017

Affordable housing: A Key Focus area of the Government

To promote affordable housing in India, the government is taking corrective initiatives lately. The property prices have escalated substantially over the last few years due to which home buying had become an affordable proposition. To meet this demand gap and to provide ‘Housing for All by 2022′, the government is focusing in this key area at present.

On December 31, 2016, the Prime Minister announced to provide rebates on home loans under the Pradhan Mantri Awas Yojana (PMAY). This move has come at a time when the real estate in India is reeling under the pressure of a slowdown. Having said that, the government has even made sure that it would monitor builders in order to fast track project completion and ramp up Indian real estate growth. Under PMAY, the government is providing 4 per cent subsidy on the interest rate for home loans of up to Rs 9 lakh, and a 3 percent subsidy on home loans of up to Rs 12 lakh. Through this step, it has indicated that the key motive of Modi government is to promote affordable housing in India.



Why did banks cut its lending rates?

Pressured by the government, many banks have reduced their lending rates recently. The Finance Ministry has reiterated that the banks need to cut its lending rates because the Reserve Bank of India (RBI) has provided relaxation on its key policy rates. Until this New Year, not many banks reduced their rates. If few did, it has not been a sharp cut. Most of the banks have a high rate of interest, which is unreasonable for the home buyers. The property prices are on the higher end and the sector is facing a lack of demand. The real estate developers have requested the government and the banks to lower down lending rates so that it can help them to reduce their existing high unsold inventories. In addition, the lower lending rates will boost home buyers’ confidence and interests in the property market, thereby, reviving the market sentiment.The State Bank of India (SBI), which is India’s largest banker, has recently reduced its marginal costs of funds based lending rates (MCLR). SBI’s home loan rate has witnessed a sharp fall lately.  In its last review, RBI has kept its rate unchanged due to economic pressure and slow GDP growth. In the beginning of 2017, the banks have finally reciprocated and reduced their lending rates to provide some relief to the home loan borrowers. Due to demonetization, the bank deposits were flooded with money, which compelled bankers to reduce both deposits and lending rates. SBI’s new lending rates are at 8.65 percent against 9.55 percent earlier.

Similarly, many other banks such as ICICI, Punjab National Bank, Dena Bank have all reduced their lending rates, which is quite attractive for the home loan borrowers. Such steps will enhance new launches in the affordable housing segment. Once there is foray in fresh residential projects, the home buyers who cannot afford to buy a property of Rs 50 lakhs will definitely have an option for affordable projects. In fact, the new rate of interest by banks will also help to fullfil the dream of the first time home buyers to purchase affordable properties.

How the Union Budget will affect the affordable housing segment?

The government has given ‘infra status’ to the affordable housing segment in the Union Budget 2017-18. This would enable developers to raise funds at lower interest rates. It will provide volume boost in construction activity across the country and act as a catalyst to meet the objectives of Housing for All by 2022. It will attract foreign investors, good companies and external commercial borrowings into the segment. The promoters usually face a delay in project completion. For this, the government has increased the project completion timeline from three years to five years that will help the builders to complete the projects in the pipeline. This will help the affordable segment in the near future.

The criteria for affordable housing has been modified from built-up area of 30 / 60 Sq Mts to carpet area of 30/60 Sq Mts in the Union Budget announcement on February 1, 2017. This step has made the low-cost housing segment more lucrative for the home buyers and developers. Now, the home buyers will get spacious homes and help builders to cater to a larger segment of buyers. No cash transactions above Rs 3 lakhs, will bring transparency in the real estate market in India. It will discourage the flow of unaccounted money into the affordable housing segment and increase dependency on bank loan. The government announced construction of Rs 1 crore houses in rural areas by 2019. This is likely to give affordable housing a further shot in the arm. The finance minister announced the closing down of FIPB and online processing of FDI applications. He also hinted at more reforms in the policy in the near future. FDI funds hold a key towards influx of capital funds in the real estate sector and these steps are going to encourage FDI in the sector. Nevertheless, the expectations are also high now on the next review of RBI’s monetary policy. To revive demand in the real estate sector, the RBI may likely drop down the key policy rates this time. Once this happens, there will be more room for the banking sector to control their lending rates and boost confidence among the home loan borrowers.


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