The sluggish growth in housing finance business despite series of Government initiatives to promote affordable housing shows that India still need diagnosing the problems in the real estate and may needs alternative housing finance models to allow the majority of population to buy inventories of unsold housing unit and induce the builders to launch new projects under affordable housing. Why the Government initiatives are not succeeding to uplift the real estate market and what are the reasons that despite fall in rate of interest and extended scope of Credit Link Subsidy Scheme (CLSS) for more people, the outstanding loan portfolio at banks observes negative growth on month to month basis? Let’s try to understand the market for Indian real estate and housing finance business.
Until liberalization the real estate developers were largely dependent upon informal investors who used to invest in properties and release payments in instalments. After possessing the properties, they used to sell it to genuine buyers and reinvest the yield in other properties. This accumulated demand for housing in India (from informal investors to genuine home buyers) caused total market demand exceeding to actual supply. Supply being less than demand for housing in India caused housing inflation remains higher than overall inflation in India and this attracted many builders to develop properties. To hide actual income and evade liable taxes thereupon, such builders preferred seeking informal investments to realize major value of properties in black (cash). This trend of informal investments into real estate market caused drainage of surplus capital generated in the informal sector into real estate.
Considering the fact that housing is beyond buying capacity of poor Indians and there is need to introduce formal finance for development of housing units for poor workers in India by 2005 the UPA Government floated affordable housing and announced provisioning of 100% Foreign Direct Investments (FDI) for affordable housing. The liberalized FDI caused a boom for foreign investments into Indian real estate. But a large number of informal investors missed to envisage the impact of FDI and went on capitalizing real estate properties and traditional builders kept developing properties booked by these investors. On the other side since large builders with support of foreign investments also kept developing many housing projects, the stock of housing units in Indian market exceeded the actual demand by 2011-12. And so 2012 onwards the Indian real estate market started showing a recessive trend. With hope about new Government at centre taking due initiatives to improve real estate market, majority of builders and investors opted to wait and watch till 2014.
Under excitement about initiatives from the new Government taking place at Centre in May 2014, the Inflation rate for housing in India was recorded as 13.73%. But the way new Government declared its policies about real estate after resuming the charge, the hope disappeared and the housing inflation took a 52% dip by very next month to record as low as 6.85% in June 2014. Though during last 43 months various initiatives to boost formal finance into housing segment caused rise in housing inflation, it has yet to reach the level it fell in was in May 2014. If we analyze various Government initiatives, we may see that Government is unlikely to allow the informal sector capital flow towards real estate. The Government is rather trying to create transparency in the real estate business and ensure fairer and assured delivery to the end buyers of housing units. To do so at one end the Government is boosting inflow of formal finance into housing projects and on other end extending the reach of credit link subsidy schemes to more and more people.
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